How Does the Cost of Living Crisis Affect Mortgage Affordability?

The cost of living is rising dramatically in the UK. Rising inflation and proposed tax increases are due to hit the average consumer’s budget. This will be particularly hard felt in April when the Bank of England is expecting energy inflation to increase by 31% to 58% after Ofgem’s energy tariff caps are raised. Additionally, the government has proposed an increase to the national insurance rate of 1.25%, equating to an over 10% rise in amount of tax paid by employees. Both will increase first time buyer’s monthly costs, and the lack of sufficient wage growth to cover these costs will compound the problem.

The significant rise in the cost of living is important to first time homebuyers and it will affect mortgage lenders assessment of their ability to afford a mortgage.

An affordability assessment is a series of checks the mortgage lender will carry out to ensure you can afford the mortgage you intend to take out, both now and in the future. More simply, the lender uses these checks to confirm the borrower’s income will exceed their costs (including the mortgage costs) during the term of the mortgage.

Lenders are not allowed to provide loans to borrowers that cannot afford them, and it’s not in their interest to do so.

The checks carried out by the mortgage lender will be comprehensive and incorporate financial and non-financial information to ensure the mortgage lender has an accurate view of that borrower’s ability to afford the mortgage. Some examples of what the mortgage lender will look for includes:

1. Proof of income and expenditure from independent sources (examples: tax returns, payslips, bank statements)
2. Credit score from a credit reference agency
3. Type of property (e.g., a leasehold property, see our article on them here)
4. Age of the borrower, and how far they are from retirement age
5. Ensuring that the borrower is on the electoral role

These are some examples of the checks the lender will carry out, but there are many more a mortgage lender may use to create a full financial snapshot of each borrower.

When mortgage lenders assess whether or not a first-time buyer can afford a mortgage they will seek to confirm if the borrower’s income will exceed costs during the term of the mortgage. Higher inflation and taxes mean higher monthly costs are on the horizon, meaning first time buyers will have less room for error to qualify for a mortgage.

With consumers being squeezed by cost of living rises, they will need to find a way to lower their mortgage’s monthly repayments. This can be done by boosting their deposit, but with Help to Buy due to be phased out in March 2023, first time buyers are running out of options. Bank of Mum and Dad is a possibility, but not everyone has parents that can assist.

The path forward for first time buyers is a new deposit solution. One that lowers the amount of their repayment mortgage, keeping their monthly repayments low. OnLadder’s deposit mortgage will help them do that. Instead of charging a high interest rate, we offer first time buyers the opportunity to leverage equity in their home to pay our loan back when they sell or remortgage. This is the key to changing the game and allowing first time buyers the ability to afford that first step onto the property ladder and start building their financial future.

• Cost of living crisis | The Institute for Government
• What's a Good Credit Score? - OnLadder
• Leaseholds and Freeholds: What's the Difference? - OnLadder