For many years the banks in Spain have worked off affordability ratios rather than multipliers of gross incomes.
The FSA in the UK who are looking at changes to be implemented this year after the credit crisis of 2008 and 2009 are looking like they will insist in future lenders in UK work on affordability ratios in the same way.
Fast track lending and self-certification will almost certainly disappear from the market and the documents required for a mortgage approval increase considerably for all applicants as has been the case in Spain.
UK residents will have to get used to providing a significantly increased levels of paperwork which will no doubt come as shock to everyone except perhaps those clients who have applied for mortgages in Spain recently who will already have experienced the high level of due diligence required and heavy document requirements that are insisted on.
Debt to income ratios often provide a higher level of funding for those clients with little or no other debts outside the mortgage but penalize heavily anyone with personal loans or credit card balances.
If the UK follows Spain banks will work off debt to income ratios of around 35%. This means that the amount of money going out each month on repayment of loans, cards and mortgages cannot exceed 35% of after tax not pre-tax incomes.
After years of easy money many clients who previously experienced no issues in obtaining further loans because of a high credit rating will find obtaining lending a much more difficult and painful process.
As brokers in Spain arranging Spanish Mortgages, we are very used to working with these restrictions but know from feedback from our clients that there is a real resistance on their behalf’s to supply so much information and a complete lack of understanding of why and how the banks work. Often clients who are rejected by Spanish banks cannot understand, as they have never had issues raising money in the UK. These very clients may in the future find UK lending difficult to achieve.
One of the key issues of the application process when working off debt to income ratios is everything has to match up so what appears on credit files must match with what is seen going out from bank statements. Because credit files and actual payments do not always match exactly the level of detail, a client then has to provide to confirm actual payments is high and precise and becomes extremely frustrating when dealing with an application as logic and judgment don’t apply just tick box verified facts.
It looks like the days of “The bank has the property as security so what’s the problem” are going to be well and truly over.
I many ways affordability ratios in fact make a lot of sense but there will almost certainly be a cultural backlash to the changes.
For once the UK will follow Spain rather than the other way round.