A recent addition to the lexicon of the Mortgage Adviser is the saying “Loan to Income”. Since the introduction of Mortgage Market Review (MMR), there has been an increasing number of Lenders that now have this policy in place. Essentially, Loan to Income means that the lender will cap the lending that it can offer to the client, based on their incomes. This is a bit of a throwback to the “old days” where lenders would offer three times first applicants income and 1.5 times the second. It is not that complex, as most lenders now cap lending to between 4 & 4.75 times an applicant’s incomes. Dependent on lender, this may or may not include bonuses/commissions. There are also some lenders that have further reduced this cap, to 4 times income at lending over £500,000.
Following MMR, the Bank of England imposed Lending restrictions on the lenders, who can now only allow no more than 15% of its new lending to be above 4.5 times the applicant incomes, the lenders have had to rework their lending models to include this cap. What this means from an advice perspective, is that a mortgage adviser need to discuss overall affordability with the client and take the cap into considerations, when discussing lending ability. A typical scenario, is where a client has a good track record of bonus and commissions, which lenders, will take into account (sometimes as much as 100% of this) but then fall short, as the lenders cap can just be based on basic incomes. When discussing Affordability with the clients, this is now where the communication is key and that the adviser does make the client aware of the need to cover the Loan to Income requirements as well.
A good rule of thumb to work from, is look into Income, apply the cap and then look at affordability. If the client fits all of these areas with the required lender, then you are good to go. If not, look at the next best alternative. The quality of the advice to the client is key here, as with any regulatory changes, the person that finds this out last, tends to be the consumer! If the adviser is doing their job correctly, they will not hide this recent change but embrace it and explain why this has been brought in.