Mortgage brokers have said a growing number of lenders are retaining debts on affordability even when they are being cleared. In plain English, that means lenders are ignoring the fact that someone may be using a remortgage to pay off their debt and assuming those debts will remain.
In some cases brokers say this is an unfair and “infuriating practice” as it impacts what people can borrow, but in others they say lenders are right to be cautious: “You can forgive lenders for being cautious as, in many instances the lender is releasing thousands to a borrower before the debt is consolidated. Who is to say the applicant doesn’t disappear with the money and spend it on a holiday, a new car or a new set of Turkey Teeth for that all important profile pic.”
what the experts say...
Mike Staton
Mortgage Expert
Director at Staton Mortgages
"Whilst this is an infuriating practice, you can't help but feel sorry for the lenders when discussing this. Unfortunately, we live in a time where the Instagram Generation want to live a Champagne lifestyle on a lemonade budget. You can forgive lenders for being cautious as, in many instances the lender is releasing thousands to a borrower before the debt is consolidated. Who is to say the applicant doesn't disappear with the money and spend it on a holiday, a new car or a new set of Turkey Teeth for that all important profile pic. "
Jack Tutton
Mortgage Expert
Director at SJ Mortgages
"Lenders retaining debts into mortgage affordability is something that we are seeing more often, especially with higher risk cases. This includes when the client is using the mortgage funds to repay the debts. The argument that lenders put forward for this is that people do not clear the debts when they say they would, and is based on the research they have carried out. In my opinion there is a simple answer to this, make it a condition of a mortgage offer that the solicitor repays the debt similar to how they have to redeem an existing mortgage. With increased rates still impacting affordability for many, this would be a much better solution to this problem instead of impacting what people can borrow by including the debts within affordability calculations."
Craig Fish
Mortgage Expert
Director at Lodestone
"Whilst this feels unfair, there is a valid reason behind it, and in my opinion a good one. Yes there are people who genuinely intend to clear debt to improve their financial position, but sadly there are many that have become accustomed to lifetyle spending beyond their means. There have been many occasions where borrowers haven't cleared the debts that they declared they would, making their financial position worse. These rules are there to protect the borrower as well as the lender and should be welcomed."
Darius Karpowicz
Mortgage Expert
Director at Albion Financial Advice
"This approach really negates the whole point of debt consolidation and makes life a lot harder for borrowers trying to reduce their monthly commitments. It’s almost as if lenders are saying, “Once a spender, always a spender,” which isn't fair at all. Clearing debts should count for something, especially for those aiming to get back on track. Lenders, it’s time to rethink this policy and give borrowers a fair chance."
Michelle Lawson
Mortgage Expert
Director at Lawson Financial
"This is a great example of where common sense should be applied for underwriting and lending. Whilst some people will manipulate this situation to their advantage, hence this stance being taken, there are also genuine cases where people will be disadvantaged by such a policy. There is sufficient data now to demonstrate people's spending habits and this should be a human decision and not that of a computer."
Darryl Dhoffer
Mortgage Expert
Director at The Mortgage Geezer
"Lenders' dark arts practice of heavily considering existing debt, especially when it's being repaid, can frustrate borrowers seeking high-LTV mortgages. The slow update of debt payments on credit files further exacerbates this issue. This can limit borrowing capacity, even for those with strong finances. Such a policy may discourage borrowers from paying off debt, as it seems counterproductive. While lenders focus on risk, a more nuanced approach that considers individual circumstances could be beneficial for both parties, and be more consumer-friendly."
