Affordability strategies that can make or break a deal

For brokers navigating the current mortgage market, complexity isn't just a challenge – it's a constant. From rising interest rates to shifting affordability metrics, the right solution often lies in understanding how lenders interpret a client's full financial picture. And according to Payam Azadi (pictured), director at Niche Advice Ltd, those nuances can make or break a deal.

While both credit cards and personal loans are forms of unsecured debt, lenders treat them differently when assessing mortgage affordability. "With a personal loan, it's fairly clear-cut. If you're paying £200 a month for the next five years, lenders can input that into their affordability models," Azadi explains. "Credit cards, on the other hand, are less predictable. Even if someone is on a 0% interest promotion, lenders may apply a notional interest rate of 28% to stress-test the repayments."

That discrepancy can significantly skew affordability calculations. "You could have two clients with identical £20,000 debts – one on a loan, one on a credit card – but the credit card borrower may appear far worse off under lender models."

Azadi also points to the often-overlooked "debt-to-income ratio" rule. While rarely published in lender criteria, it quietly influences approvals. "If you earn £30,000 and have £30,000 in total debts, even if you're consolidating, some lenders will simply say no. They see that level of existing debt as a risk signal."

Second charges: underused but sometimes essential

Second charge mortgages remain a niche product, but for borrowers on attractive first-charge rates or with complex credit histories, they can offer vital flexibility. "We look at them when remortgaging would mean losing a good fixed rate, or where first-charge lenders can't accommodate affordability due to recent credit blips," says Azadi.

But there are structural barriers. "Many second charge lenders won’t deal directly with brokers. They require packaging through master brokers, and the fees can be prohibitive – sometimes three or four grand. We try to handle these in-house when possible to keep costs reasonable, but the market isn't set up for high volume introducers and lenders prefer to deal with aggregators."

SPVs and tax advice: don’t skip the fundamentals

When clients ask about buying through a special purpose vehicle (SPV), Azadi's first advice is simple: talk to a suitable tax advisor. "SPVs are tax wrappers. Choosing one should never come before understanding your financial position and future plans."

He outlines key advantages and disadvantages: better tax treatment on mortgage interest and rental income calculations, but higher upfront costs and less flexibility for drawing funds. "If you plan to build a portfolio or involve family in ownership later, an SPV can be smarter. But if you're drawing regular income, the dividend tax and accounting complexity can outweigh the benefits."

Brokers also need to guard against social media misinformation. "I get clients saying, 'I read on a blog I should transfer my properties into an SPV.' But they haven't factored in capital gains or stamp duty. Undoing the wrong structure is messy and expensive."

Deposits, gifts and the risks of layering

Gifted deposits are widely accepted, but Azadi warns that source-of-funds scrutiny has increased. "If funds are transferred from a friend to a parent, and then to the buyer, lenders and solicitors may flag it as money layering. We need to document the original source clearly."

He adds that even minor issues – like listing a cousin as the donor – can derail a case. "How do you prove someone is your cousin if their surname doesn't match that of the applicant? It may be advisable to use lenders that do not require “gifts” from blood relatives."

Newer challenges are emerging with crypto-funded deposits and gifted equity. "You need a full audit trail. If it’s come through Coinbase, fine. But the key is finding how the original funds were generated."

What could disrupt the market next?

While Azadi sees value in targeted affordability boosters like those launched by Nationwide and Skipton, he remains sceptical of headline-grabbing innovations like 100% mortgages. "I lived through the era of 125% mortgages. Some clients are still underwater from those days. I think buyers should put in at least 5%."

He believes real disruption will come from technology. "The bigger change won’t be a new product, it will be faster, simpler processes. But advice can't be automated. A gifted deposit isn’t just a field on a form – it’s a conversation. And that’s what brokers bring to the table."

Looking ahead

With affordability pressures mounting and lender criteria diverging, brokers must double down on understanding the fine print. As Azadi puts it: "You don’t need to be a tax expert, but you do need to know when to say: this needs specialist advice. That’s where we earn our keep."

In a market saturated with tools and talk of innovation, it's clear that true value still lies in knowing how and when to use them.