“Some lenders publish their leverage ratio, so brokers can check, but this normally only appears at the DIP stage.”
Most lenders have a “debt threshold”, beyond which affordability is significantly reduced. This debt threshold differs significantly between lenders and even between applicants, depending on the size of the total income concerned. Even with an income of over £100,000 this threshold can be surprisingly low and will of course depend on the overall credit score.
Credit card debt can be particularly sensitive to the relationship between available credit limits and actual debt levels, so if a customer is at or near their limits, they are likely to have a lower credit score. This is expected to increase over the next few months as borrowers accumulate larger balances on their cards and not all lenders will automatically increase borrower limits. The other problem is that many affordability calculators don’t take this into account. It often only appears in the DIP stage, so it is difficult to predict it accurately.
Another problem is not only the level of debt, but also the ratio of this to total income, known as the debt-to-income ratio. This can easily lead to rejection and will usually only happen in the DIP stage at the earliest. Some lenders publish their leverage ratio, so brokers can check, but it normally only appears at the DIP stage. One or two lenders incorporate it into their affordability calculators, which is very helpful.
Remortgage to pay off debt is likely to become increasingly common as customers feel the pinch, but it can be plagued with its own set of problems. Many lenders impose maximum LTV limits for debt consolidation (usually max 80%) and the above two scenarios are put forward for this type of remortgage.
Some of the major lenders assume that the debt will be incurred again after completion and therefore leave it in their affordability calculation anyway. Others simply don’t have the appetite for this type of clientele and set the bar very high. However, there are a number of lenders who do not share debt consolidation concerns on the same level and are happy to help you in this scenario. These lenders are likely to get busier in the coming months.
With higher debt levels and total financial pressure, some customers will inevitably “drop” their payments, which will show up on their credit records. This could present a whole new set of challenges for customers and lenders. We’ll have to wait and see how it all pans out.