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Mortgage Applications Align With Trust Deed Disposable Income

30th April 2014

Anyone that has investigated starting a protected trust deed in Scotland will understand the concept of “disposable income”. This is a process by which monthly household expenditure (bills and other living costs) are calculated. When they’re deducted from income it can be assessed how much surplus cash realistically exists each month. This is cash that can be used to repay non-priority debts, to pay into a trust deed, or to fund a different type of debt resolution process.

The system works well because it accommodates differences between family sizes, fixed expenditure (such as housing), spending priorities and lifestyles. It also budgets for less regular expenditure (car tax renewals for example) so that money is available when it’s needed. The process is detailed and can be time consuming, but it’s also accurate and provides an excellent future household budgeting tool.

Mortgage lenders and mortgage brokers have also always been expected to consider affordability when making lending decisions. Their mode of operation has traditionally been quite different however. For example, many people still think the concept that you can borrow three or four times your annual income might apply. This is the type of affordability “test” that has been used by the mortgage industry in the past.

As now seems very obvious, this lack of attention to detail could lead to problems. As an example, take two families with the same level of combined income. One sends their child to the local state school. The other chooses to spend £1,000 per month on private school fees. Which family could afford to repay a larger mortgage? The same concept applies to car payments, credit card bills, food expenditure or utility bills.

Worse still, in the run-up to the credit crunch basics like income levels were often not verified. The end result was thousands of people borrowing more than they could afford, some suffering repossession, and many others building up huge debts just in order to get from one month to the next.

The Financial Conduct Authority has introduced the Mortgage Market Review (MMR). Measuring affordability is at the heart of the new rules created by the MMR. If you approach a mortgage lender or broker in the future you can expect to have to provide details about your income and expenditure in a way that isn’t dissimilar to that used by debt advisors for trust deed applicants.

In our view this is a positive step. A mortgage is the largest financial commitment that most of us ever make. It’s crazy not to take into account individual preferences and lifestyles when working out what’s affordable for a borrower. This step protects both the borrower and the lender.

Mortgage brokers aren’t so sure. Their general practice for years has been to demonstrate affordability at the level a client wants to borrow to, rather than to accurately assess their real level of spending to find out what level of mortgage is affordable for them. Brokers are concerned that the process will take hours, will frustrate clients and will result in more applications being rejected. They’re also being asked to do more work without any consequent increase in their remuneration.

The subject of obtaining a mortgage after a trust deed often gets discussed in our forum. We’ve also covered the subject in some detail here. For the future it’s clear that affordability is going to play a more important role in the process. Anyone that has been through a Scottish trust deed is likely to be quite comfortable and familiar with this process.

Some extra factors to consider if you’re looking to get a new mortgage in the future:

  • Taking on new debts might help you to rebuild your credit file, but the level of repayments that you build up may well restrict how much you can borrow.

  • Using a payday loan may be seen as a sign of financial distress or incompetence. Mortgage lenders hate them, so avoid them even if they will be repaid on time.

  • Car finance can be quite expensive, especially soon after a protected trust deed. A high monthly payment is likely to reduce your mortgage borrowing capacity.

  • Think through adding new regular commitments. For example, upgrading your Sky package will also reduce your disposable income and capacity to borrow.

  • Keep on top of your costs. Switching your utility providers and insurers regularly to keep costs down might also mean that you can get a larger mortgage (if you want it). 

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