Mortgage lenders penalising couples with children

[anotherfluke]

"Mortgage lenders are penalising home owners with children by reducing the amount they can borrow. The crackdown could potentially prevent them from switching to cheaper deals when interest rates rise.

Many banks and building societies have tightened their affordability criteria in light of the Financial Services Authority's post-credit-crunch review of the mortgage market. But it has emerged that families with children are being hit hard.

Parents will now usually qualify for a smaller mortgage than similar couples without children. Depending on the lender, the reduction might be about 10pc, but could be as high as nearly 20pc. This has triggered fears that parents may not be able to switch to fixed-rate and other competitive deals to protect the family home when interest rates finally begin to rise."

Full story from the Telegraph yesterday

TBH it makes sense particularly when lenders often don't take into account the cost of childcare when assessing affordibility.

It always suprised me that when applying for a mortgage the bank were interested in the fact that I had an unsecured loan repaid at a rate of £100 pcm but were totally unconcerned by the fact that my childcare costs (without which I would have no income) were in excess of £2500pcm.

Aren't the banks just taking into account all of the outgoings? A couple without children don't have the expenses of a couple with children. When I applied for a mortgage I had to list all of my outgoings. Isn't this just the same thing?

Depends how they're doing it.

If they are doing full affordability calculations and calculating lending based on that +for each couple. And then on average it turns out that couples with children can borrow less than those without because of different outgoings, then fine.

If it is built into their lending criteria that they will reduce the amount a couple can borrow simply based on whether they have children or not, and irrespective of income/outgoing calculations, then not fair.

They can do whatever they want though AFAIknow.

OK read the article.

They are reducing the amount they will lend just on the fact you have children, irrespective of actual affordability calcs.

One quote at the end "A spokesman for Nationwide said: "A couple with children will have extraordinarily different outgoings compared with a couple without children. When assessing affordability, we take this into account."

I think this is rubbish though. When I was single I spent a bomb on going out, clothes, makeup. Smoking, drinking, meals out. Many people have terribly expensive gym memberships and go on flashy holidays.

Yes children need to be paid for but it's a bit off to reduce a couple's loan amount just because they have children. Do they really think that people with children are likely to be much more irresponsible than those without? Arse about face IMO.

They should do proper affordability calcs and use the same formula.

I don't think its about people with children being irresponsible. Surely it's simply about affordability.

A mortgage which is being taken out on the basis of a dual income, needs to factor in childcare costs, which clearly people who are childless won't have.

As Nancy says, childcare is likely to be the biggest financial outgoing for a couple, certainly while any of the children are pre-school age. Ours cost a lot more than our mortgage did! And as Nancy rightly says, childcare is the one expense which is directly related to the fact that both couples are working. You may be able to cut your cloth a bit in other areas of your life, but if you both work, you need the childcare to go with it.

Sounds sensible to me

Erm

If they do affordability thoroughly they will know about outgoings including childcare costs.

To knock 10% or 20% off the loan amount purely because of children is unfair. One of the parents might be a SAHP. They have no idea. People who don't have children can have large outgoings that I identified earlier. They could be paying for eg care for an elderly relative.

The way to do it is to ask about outgoings, the way they are going about it is not logical.

I see your point, but childcare is rather different as it's the one expense which is directly related to both parents working. If one parent is a SAHP then the mortgage wouldn't be based on two incomes in the first place. Paying for care for elderly parents might be an optional thing which some people pay for, but it's not a necessity - whereas childcare is. The parents will either have one parent at home(thereby reducing the family income significantly) or both parents working (thereby reducing the family income through childcare costs)

It's probably sensible. I agree with Nancy. Was slightly bemused by the spotty youf masquerading as a financial advisor (provided by my private banking service at no small cost) suggested product after product based on my income, but took no account of childcare costs and school fees ... It's time that financial institutions realised that children are a blooming cost :)

violet most people I know are fortunate enough to have family who care for the children for free.

What they need to do is sort out their affordability criteria - if they have realised that childcare is expensive (how did it take so long?) then ask the question. I don't think that taking a broad brush approach like this is fair or particularly logical.

What was interesting in the article was it made the point that this new factor in calculations might mean that people who borrowed under the old rules are not able to remortgage when their current deals come to an end. We know that interest rates are going to go up, in the not too distant future, they might well go up a lot. What this does is ensure that many families are tied into deals which suddenly become incredibly expensive. Feels a bit suss to me...

Oh and weren't so-called "balloon mortgages" in the US the reason that it all went tits up across the world in the first place?

Hmmmmmmmmmmm.

Do most people with children get free childcare? I would be really surprised about that. And where it does happen, it's usually among low paid people who can't Afford proper childcare so hardly a typical mortgage Market.

Are there are really hordes of people out there on decent incomes who use family for free childcare ... Thats pretty shocking if true.

I'm sure the lenders have done their sums over this, and on average people with children are found to have much bigger outgoings so it makes sense to factor this in

No they don't I'm sure, but some do, and it's not outrageously uncommon. Around here most of my friends do and we're not on low incomes. People have retired parents who do it. Not sure if or why it's more common here than elsewhere, but it is common. The toddler groups are packed with grannies and grand-dads.

That's not the point though really - the point is that they are arbitrarily applying an adverse decision to everyone who has children irrespective of their actual circumstances, which doesn't make sense.

Lenders doing their sums - well if they've only just realised that childcare costs money then they've hardly got their finger on the pulse. In most financial institutions the decisions on this stuff are one of the lenders thought it sounded reasonable and the rest have followed suit.

I may be overly suspicious but the tied in/imminent interest rates rise sounds like it could have been a strong (but unmentioned, obviously) driver in this.

managed to delete a load of stuff.

In many financial institutions these types of decisions are made by a high-up bloke with a calculator and a bit of old paper, in this case someone thought it sounded good and they've all followed suit.

If they were really interested in childcare etc costs they'd ask the question. It is a strong possibility that they are actually interested in tieing people in to high rates. I mean, they're not in the business for love.

"the point is that they are arbitrarily applying an adverse decision to everyone who has children irrespective of their actual circumstances, which doesn't make sense" - but the same could be said for insurers who price different groups of people differently according to the perceived risk of that group, not the individuals within the group. Same principle

When we went in to get a mortgage in 2004, they wanted to include the CB, asked if we got tax credits so they could add those into the "affordability" calculator too.
All this did was push up what we could apparently stretch to in order to buy a house which just 3 years previously would have been within the 3 times DH's salary bracket.
Wrong, wrong, wrong, people need a cushion and the banks were not getting their hands on my CB which fed us when DH lost his job.

Yes people like to criticise banks for taking unnecessary risks, yet still criticise them for applying risk based decisions to customers

allnew there is a difference in the way those two things are priced, and the nature of them Mortgage policies are highly individual - they ask and know a lot about your actual property, your income (with evidence), your outgoings, credit check and so on. It is quite a personalised scrutiny of you and your property so that they can decide whether or not to lend - that is what they are working out. There are shades of what sort of risk you are which determine LTV and interest rate but still the basic thing the underwriter is working out is will they lend, can you pay it back, will you pay it back. I don't see why they should not ask some more probing questions about child costs while they are at it.

With insurance the insurer does not gather such a lot of information and there are many more unknowns. What the underwriter is assessing is the risk of you claiming, and for obvious reasons that is not an exact science. eg a life policy not everyone is fully medically underwritten but you answer a series of screening questions, a motor policy they have no way of knowing how you drive unless you have been nicked, and so on. Obviously there are a trillion different sorts of policy but generally actuarially calculated base rates are used, they are a starting point that are then adjusted according to the risk. There is also a payoff in how many questions people will answer for insurance before they decide you are a PITA and go elsewhere - people are used to giving quite full information for mortgages.

I have underwritten for mortgages and insurance policies of various types in my time and they really are a different kettle of fish, they are completely different products and I don't think it's correct to draw parallels in this way.

Try another way.

Mortgage companies currently ask what your monthly outgoings are, including all regular expenses. Childcare costs are obviously included in that.

They then take 10% - 20% off what they are prepared to lend you anyway.

Is this fair? I say no. If they are concerned about childcare costs then ask better questions in the first place, along with all the other financial information that they are for.

Is it the case that they have had a lot of people with children defaulting while people without children have not? They haven't said that, I would have thought they would have said if they had, to make their point. Fact is that they don't know whether the people who default have children or not - it's not information that they gather AFAIK.

The idea that they are keen to tie people into high rates is looking more likely all the time.

Fully agree that childcare should be asked in the affordability calculators, but totally oppose the idea of a blanket reduction as it does not assess people's needs.

Maybe I'm lucky, but I have a lecturing job whereby I work part time, term time hours so my childcare costs only about £100 a month. To reduce a blanket 10 or 20% off my affordability would be disproportionate. As other people have said, not all parents have expensive childcare costs.

Further, since having children I've not had a foreign holiday, stopped my gym membership, stopped buying expensive clothes and now never go out - so its not that I have more costs, but I have transferred many of my costs from luxury items to my children!

I'm all for calculating affordability - its a great idea, but it does need to be done properly and fairly.

Because current childcare requirements are not an accurate predictor of future requirements. Also it's very common for a couple with both parents working, for the situation to change and one parent then go part-time, stop work etc etc. There are all sorts of reason why a couple with children may incur higher costs which are not known on the date the underwriting decision is made. Yes of course same could be said of childless couple, but they can only go with whatever risk based decision they build into their underwriting rules

The parallel was that it is commonplace for financial institutions to apply underwriting criteria of their own choice, based on the risks they perceive. Not discrimation as far as I'm concerned

What the companies are doing is sensible from a business point of view but it will be painful for many of us.

If you have a mortgage and are living with no room at all in your budget then obviously there is no chance to do anything but if there is any squeeze room at all I think most people (especially those with children) seriously nee to do what they can to put extra into overpayments.

and tbh, if someone is trying to borrow the absolute maximum for their salary when base rates are 0.5%, it's probably not the best move anyway

In the old days back in the 1960s banks would only lend 3 x the mans salary and completley ignore the womans income. That was because women generally forced to stop working as soon as they had children so it was rightly not regarded as true permanent income available to pay the mortgage.

In a way that is what is happening again but by discounting the amount lent to families with children. It makes financial sense. DCs definitely cost money.

Lending you less because you have more people to feed and clothe I absolutely agree with. Making you pay a higher interest rate I would think is discriminatory and a very dangerous road to go down.

We saved up £25k over 8 years and spent it on home improvement but they won't loan us anymore money to finish the house because we can't afford it on paper

It annoys me that they don't take your past savings history into account

allnew and of course insurers and lenders can set their criteria as they see fit.

My point is that it is not fair to apply this blanket reduction when they are in a position to just ask the question.

Your idea that childcare costs change - yes they can fluctuate wildly - but if the children are already in the family I would suggest that it is more reasonable to assume that, for an average couple, things will remain pretty static or even improve:

• childcare costs tend to reduce as children get older, so future costs will be lower not higher
• people who already have children are often more stable employees - if someone is going to go part time or stop work they will probably already have done so

In fact you arguments mean that if anything, couples of childbearing age without children should have their LTV reduced as they are much much more likely to massively change their finances through having children. Then you have the potential to drop from 2 incomes to 1 or 1.5, childcare costs and so on. People who have children are already doing it, you are underwriting them at the point where they are already incurring and paying these expenses and if anything those costs will lessen.

I just think that what they are doing is illogical and the more I think about it the more suspicious I am of the real motivation.

Can't believe I'm arguing about this

I'm going to bed.