The importance of pragmatic underwriting in times of tightening affordability

Introduced in 2014, lenders have had to assess a borrower’s ability to repay a mortgage by stress testing their ability to pay the loan if the rate was three per cent above a lender’s reversion rate. While the loan to income (LTI) limit will remain as a bulwark against an overall rise in household indebtedness, this relaxation will undoubtedly help borrowers wanting to move or to re-mortgage in a climate of rapidly rising interest rates.

On the other side of the coin, the cost-of-living squeeze is already seeing lenders taking action to ensure they continue to lend responsibly. Many are amending affordability calculators to override the Office of National Statistics data commonly used in their assessments. Increases in energy and fuel inflation are being overlaid with appropriate increases or, in some cases, a more general inflation figure is being fed into assessments across the board.

This is nothing more than responsible credit risk management, but it makes the announcement from the PRA that bit timelier. However, that measure alone will not help everyone. We need an approach to affordability that provides reasonable rules and sensible underwriting judgement.

Underwriting plays a crucial part in lending, and how it is executed makes a significant difference to a borrower’s chances of getting the loan they need. That is why, we believe, pragmatic manual underwriting is key, as often the ability to go beyond 'computer says no' is the difference between a deal dying on its feet and getting it over the line.

What is particularly striking about this is how often experience and expertise in this area is about nuanced understanding that in reality does not represent anything other than being able to make a responsible loan through some sensible decision-making.

At the heart of getting the right outcome for your clients, who sometimes have more complex needs, is a knowledgeable team of BDMs. Their experience and relationships with broker partners and underwriters mean they understand what every party is trying to achieve and therefore obtain the information and counsel they require, acting as the connector to all parties.

Our broker partners will often say that our support is the difference between clients securing the deal they need or getting nothing at all. Lenders can be both responsible and also be in the business of trying to say yes – and when they do decline, they should do so early to avoid frustration and disappointment later in the process, when so much more time, effort and client emotion has been invested.

There are thousands of people in our modern economy who face similar complex situations and where things like income assessment are no longer straight-forward issues. Complex income is a stumbling block for all kinds of borrowers in a global gig economy where huge swathes of borrowers earn their livelihoods from many disparate sources. Society is changing, people are living longer, and their circumstances are more complex, so while affordability measures undoubtedly matter, sometimes a bigger picture viewpoint is required to fully understand the potential of a borrower as well as any risk they may present.

And when lenders are looking to innovate and bring new propositions to market there obviously has to be the fine balance between risk and reward. Lenders are here to take sensible levels of risk that is aligned to their individual appetite. Having a pragmatic and a ‘can do’ attitude to underwriting that takes a realistic view of borrower risk will become increasingly important.

Affordability will be a challenge for everyone over the coming months and we know it will be more important than ever to maintain a nuanced approach to underwriting in order to service borrowers who need our help.

If you want to know how we can help your clients to achieve their dream of home ownership, please contact your Business Development Manager to find out further information.