Since taking over the regulatory responsibility for the UK Financial Services market in April, the Financial Conduct Authority (FCA) has introduced a range of measures aimed at embedding a more sensible approach to lending. The measures tackle issues across a range of products – from Payday Loans to Mortgages and everything in between – and use a variety of tools including;
- Proposed rate cap for short term high cost credit
- Increased scrutiny of advertising material
- Greater responsibility on lenders to prove suitability of their products
- Proposed limits on the total cost of credit for short term products
- Stress testing mortgage applications to ensure the applicant could cope with possible future interest rate rises
But if there’s one theme that re-occurs strongly across all products then it’s the onus on lenders to ensure that their products are affordable for the borrowers – and be able to demonstrate that affordability with documentary evidence.
The FCA introduced tighter regulations for Mortgage Lenders in April which moved focus from a simple income multiplier to calculating loan amount based on affordability (i.e. income less monthly expenditure). The same is also true for providers of loan products in the unsecured loan market – with lenders having to show that they have evidenced their assessment. Borrowers are therefore much more likely to be asked to provide Bank Statements, Payslips and Benefit Statements to support the income and expenditure they are declaring. The lenders can use these to cross check declared expenditure against the application as well as the results of credit searches detailing existing credit commitments.
Whilst credit history remains important it is no longer a given that applicants with an excellent credit score will be offered a loan. Some borrowers are likely find access to some credit products more difficult if their monthly commitments are already high.
Lenders won’t just be looking at existing credit repayments but will also factor in monthly commitments such as mortgage or rent, utility bills, mobile phone bills, tv packages, insurance payments, gym memberships….. the list goes on.
The approach is aimed at stopping customers who are already over stretched from getting themselves deeper and deeper into credit that they cannot afford to pay back or pushing their commitments so close to the limit that the slightest change in circumstance, or unexpected bill, will tip them into defaulting on their loans.
That intention is one to be championed in a market where some lenders have previously shown scant regard for the circumstances of their customers and instead chosen to chase hard customers who are in trouble, often applying additional fees.
The approach is also a positive for the customers who can legitimately afford to repay the loans they wish to take out, and by demonstrating this to the lender greatly increase their chances of being accepted.
There are some customer types who will benefit more than others. For example, those with;
- Steady incomes – i.e. not made up of commission/bonus etc
- Fewer monthly commitments – e.g. smaller tv packages, no gym membership
- Smaller credit commitments – fewer existing loans and credit cards
So for customers thinking of applying for a loan product it’s important to understand what you will need to demonstrate to the lender and how best to about it.
Firstly, before you apply sit down and go through your monthly expenditure – categorising each type of spend whether it’s a commitment you have to make (e.g. rent) or discretionary (e.g. socialising). Many applicants think it looks bad if they have a high amount of ‘socialising’ or ‘entertainment’ on their outgoings, but actually it shows the lenders there is money that could be made available for commitments if needs be.