Lenders penalise families for their children

FAMILIES with children are finding it harder to get the mortgages they require following a tightening up of lending rules by watchdogs at the Financial Services Authority, it has emerged.

In a week in which figures showed mortgage lending at an 11-year low, not only was the FSA's mortgage review criticised by business boss Sir Richard Lambert, but it emerged that families with children are being penalised by the shake-up.

In his outgoing speech, Confederation of British Industry boss Sir Richard said: "The Mortgage Market Review is being driven by the Financial Services Authority rather than the government, but this is not the right time in the housebuilding cycle to be making mortgages harder to obtain."

He went on to express concern about the impact this was having on families, and said: "Family balance sheets are still stretched by high levels of personal debt. The housing market is weak. Family budgets are being squeezed between high consumer price inflation and low growth in wages."

These concerns were echoed by leading mortgage brokers, who accused lenders of penalising families with children by reducing the amount they can borrow.

Depending on the lender, parents are likely to now find they can only borrow 90 per cent of the loan available to a childless couple on the same income. Some lenders slice off nearly 20 per cent to couples with children.

Reducing how much parents can borrow could potentially prevent them from remortgaging on a fixed deal as rates rise, leaving the family home exposed.

Mortgage broker Carol Begbie, of Female Independent, said: "We are finding it very frustrating when trying to help families with children to find that the amount they can borrow is being slashed simply because of the children.

"Dealing with lenders is absolutely awful. They are being hugely difficult at the moment. My own personal belief is that it is totally unfair to single out people with children.

"The worry is that when rates start to rise, these families may not be able to reduce their monthly repayments as a childless couple could. Where is the sense in that?

"A couple who took out a mortgage a few years ago might come to us now asking for a fixed loan to protect against interest rate rises, or some other competitive deal. However, because the amount they can now borrow is reduced, they won't be able to make the switch.

"This could leave them trapped with potentially unaffordable mortgage bills. The only other option we have is to ask their existing lender for a better deal or a fix, but it probably won't be ideal."

When brokers begin the mortgage application process for a client, they tap in income, any other credit liabilities and basic lifestyle information, such as whether they have children.

Following the Mortgage Market Review, most lenders now use computer-driven affordability models, which calculate how much they are prepared to lend, and then reduce the amount according to a range of factors.

Children are now ranged with indebtedness as a negative when it comes to the prospect of the loan being repaid.

But the systems are riven with anomalies. For example, the Halifax will lend more to a family with four children than one with two, because of a glitch in the data used. Once a child reaches 18, they are removed from the equation, even though parents may be supporting them through their studies.

At Abbey, for example, a couple with no children both earning 25,000 might be offered, depending on their credit score, 201,687, while an identically credit-scored couple with two children would only get 179,852. It drops again for four children to 174,420.

Applications to Nationwide via the broker channel take the biggest hit. A childless couple might be able to borrow 207,700. That falls to 174,200 for two children, but by 18 per cent to 170,400 for three or more.

Nationwide says that if customers come to them direct they may be more generous. Even so, a childless couple may qualify for 225,000, falling to 222,000 with two children and 217,000 with three children.

Council of Mortgage Lenders spokeswoman Sue Anderson acknowledged lenders are now increasingly taking this approach: "I'm afraid this is the way the world now is. Lending has become more sophisticated, which was inevitable given the change in the regulatory requirements.

"We have had a period where borrowers were allowed to assess what they should borrow, and the regulator has concluded that didn't work. If you have to have proxies for family expenses, the cost of children is a reasonable one."

Mark Harris, managing director of Savills Private Finance, said: "Lenders have to build these affordability models so they can demonstrate to the regulator, if challenged, that they have been lending responsibly. But these things are computers. There is no leeway for human intervention or discretion.

"It is all a bit of a nonsense. What's to say a young childless couple who qualify for a certain loan today won't have children when they come to remortgage in a couple of years' time?"

Begbie agrees: "Lenders are too reliant on their systems. There is no room for common sense or discretion. You can never get to speak to an underwriter any more. They won't take your calls."

Ray Boulger, of brokers Charcol, says some lenders are "running scared of the regulator". He added: "Certainly, if a young couple borrows the maximum before having children, and haven't had any wage increases, when they come to remortgage they could face difficulties."

The FSA dismisses any suggestion that it requires lenders to penalise families with children. However, a spokeswoman added: "We want people to be able to afford their mortgages and be seen to afford them. We do expect firms to carry out affordability assessments, but we are not proscriptive about how this should be done."

An Abbey spokeswoman also denied the bank operated discrimination against families with children. However, she said all mortgage applications were assessed on a case-by-case basis, adding: "Each case will be different, and we will assess a whole range of factors, which will include regular expenditure. Children will be a factor in these calculations."

Nationwide spokesman Steve Blore said: "A couple with children will have extraordinarily different outgoings compared with a couple without children. When assessing affordability we take this into account."