Borrowers who take out large mortgages on the basis that they will wipe out existing debts will be increasingly scrutinized by lenders amid the cost of living crisis, mortgage brokers have warned.
A number of lenders already have criteria in place that prevent people from taking out large loans and failing to pay off their debts once the mortgage money has reached their bank account.
An example of this is Halifax, which advises brokers that any outstanding credit commitments would be “deducted in our affordability calculation even if declared ‘to be repaid'”.
High-risk borrowers who take out large mortgages to pay off other debts will be increasingly scrutinized by lenders
Essentially, this means that high-risk borrowers who mark a debt as “out for payment” will still be treated as if that debt will not be repaid. Brokers said they expect to see more lenders take this approach in the weeks and months to come.
This is not a new lending approach from Halifax, which has confirmed it has been telling brokers since 2020, with many other lenders also taking a similar stance.
Lewis Shaw of Shaw Financial Services said: “We expect to see more from lenders in the coming months.”
‘Essentially it’s a big high street lender saying we don’t think you’ll pay off the debt but you’ll probably go out and treat yourself to a great holiday in the Maldives, whether you buy a Rolex or you you will get into debt quickly. Human nature what it is, they’re often not wrong either.
And Graham Cox, of the Self Employed Mortgage Hub, added: “With the huge increase in the cost of living, some borrowers are not using the extra borrowing to pay off their debts, but rather to supplement their income or maintain their level. current life.
“Therefore, expect much more of this tightening of affordability criteria over the next year, particularly if property prices start to reverse.”
Lenders have taken an increasingly strict stance on lending criteria since the 2008 financial crisis to help ensure borrowers don’t get too comfortable.
But the ability of borrowers to meet their mortgage repayments is again in the spotlight as households face higher bills amid the cost of living crisis.
In what is seen as the biggest bank crackdown on mortgage checks in more than a decade, Santander last week made it harder for borrowers to meet its lending criteria as it told brokers that this would reflect rising household, national insurance and tax bills. .
Broker Lewis Shaw says: ‘Essentially this is a high street lender saying we don’t think you’ll pay off the debt, but you’ll probably get out and have a great holiday in the Maldives’
Taylor Scott-Barr, of Carl Summers Financial Services, said: ‘The reality is that many borrowers don’t pay debts once the money hits their account, or they do, but they s indebted again over the next few years.
“That’s not to say that all borrowers do it, but a large enough proportion do it to create risk for lenders.”
He suggested one option would be to make it a condition of the mortgage offer for the solicitor, or even the lender’s own advances team, to repay the debts directly.
However, Mr Scott-Barr added: ‘It still wouldn’t solve the problem of people racking up debt again.’
And for borrowers who think they can still get into debt and go undetected on their mortgage application, a broker has added a stark warning.
Mr Shaw explained: “The general public often thinks they can outsmart lenders, but the reality is that lenders have access to incredible technology and so much data that it is impossible to fool them.
“The general public often thinks they can outsmart lenders, but the reality is that lenders have access to incredible technology and so much data that it’s impossible to fool them.
“For example, through open banking and credit checking, lenders can see whether debt has been repaid or not, and they share that information with other lenders. I had a case recently where a lender refused a loan because the applicant said they would pay off a debt a few years ago, but didn’t. In the world of digital banking, there is nowhere to hide.
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