Let's talk affordability: Navigating mortgages for clients with adverse credit

This article is sponsored by Bluestone Mortgages

Affordability - it’s the magic word in the mortgage world, especially for clients with adverse credit. Why? Because it’s the cornerstone of responsible lending decisions, ensuring people can achieve sustainable homeownership without stretching themselves too thin. But for these clients, “affordability” isn’t just about traditional numbers. It’s about recognising unique financial circumstances—irregular income, higher debt, and all the nuances that come with them.

That’s where brokers come in as unsung heroes. They play a critical role in painting a full and accurate picture of a client’s financial situation for lenders. By thoroughly accounting for all income streams and expenses, brokers help clients avoid potential pitfalls, while lenders make smarter, more informed decisions. The result? A win-win for everyone involved.

Affordability in the current economic climate: A balancing act

So, how should lenders evaluate affordability today, given rising interest rates and the cost-of-living crisis?

The answer lies in balance. Affordability checks need to be thorough yet flexible, capturing a borrower’s real financial resilience. That means going beyond the basics and considering:

• Discretionary spending habits
• Debt repayment obligations
• Impact of rising living costs

Lenders also need to stress-test for higher interest rates to ensure borrowers can endure future rate hikes. With tools like open banking and tailored affordability models, lenders can access real-time financial insights, offering a clearer picture of what borrowers can truly manage.

A wake-up call: Bluestone’s findings

Let’s put some numbers on the board. Bluestone Mortgages’ research revealed that over two-fifths of UK consumers are financially worse off compared to April 2023. The average hit? A whopping £229 less per month.

Now, factor in families remortgaging this year. Some are predicted to face monthly payment increases of up to £1,000 by the first quarter of 2025 according to the Telegraph*. This underscores why affordability is more than just a checkbox; it’s the foundation of sustainable lending.

High-interest rates: What’s the fallout?

Let’s not sugarcoat it: High-interest rates are making things tough, especially for borrowers with adverse credit. Higher rates tighten affordability margins, often reducing the loan amounts clients can qualify for.

According to the Office for Budget Responsibility (OBR), average mortgage interest rate is forecast to rise from 3.7% in 2024 to a peak of 4.5% in 2027. For clients already grappling with credit challenges, this means steeper monthly payments and greater hurdles in meeting affordability criteria.

So, what’s the game plan? Brokers can step in with creative solutions:

• Partner with lenders who offer flexible underwriting for complex cases.
• Educate clients on budgeting strategies and ways to boost their credit profiles.

First-time buyers: Bridging the affordability gap

For first-time buyers, affordability challenges can feel like a mountain to climb. But lenders have tools to level the playing field.

• Flexible underwriting that considers non-traditional income sources.
• Innovative products like Bluestone’s 95% LTV mortgage through the Deposit Unlock scheme, designed to help buyers with just a 5% deposit.
• Options like shared ownership, longer mortgage terms to reduce monthly burdens, or guarantor schemes for those who would otherwise not meet criteria.

But it’s not just about the products. Lenders and brokers can empower buyers by providing financial education and budgeting tools to help them navigate the home-buying process with confidence.

The road ahead: What’s next for affordability?

The short-term outlook for affordability is tough—high interest rates and cost-of-living pressures aren’t going away overnight. But the market should stabilise, and lenders are already innovating to adapt.

Using Bluestone’s approach as an example, the team focuses on understanding real affordability for clients who don’t fit the traditional high street bank profile. By offering flexible mortgage solutions, they’re helping clients achieve their homeownership dreams responsibly.

Looking forward, we expect to see more tailored products and adaptable lending criteria to accommodate borrowers’ diverse financial realities. Collaboration between lenders and brokers will be key to ensuring no one falls through the cracks.

In summary: Affordability isn’t just the current marketing tool—it’s the linchpin for responsible, sustainable lending. By staying flexible, innovative, and client-focused, brokers and lenders can support clients in coping with economic challenges and build a path to homeownership that works for their unique circumstances.

_{Article published by Bluestone Mortgages January 2025. Bluestone is not responsible for the availability or content of any external links}