The Effect (or Lack of It) of the NI Increase on Mortgage Affordability
Written on 8 April 2022 by
The increased National Insurance rates applying from this week have focused interest on what impact this will have on mortgage affordability and hence the maximum loan available. However, the changes are tiny compared to everything else currently affecting mortgage affordability so the impact will be negligible.
Lenders ignore any short term costs which will finish within 3-6 months as:
(A) They are not ongoing
(B) Most purchasers don’t complete until at least 2 months after the mortgage application. Therefore most lenders will base affordability assessments on the NI cost from July and only applicants earning over £40,000 p.a. will actually pay more from July 2022 than in 2021/22, as demonstrated by the table below. Most first-time buyers earn less than £40,000 and so the maximum loan for the majority of first-time buyers will not be adversely affected by the NI increase.
Employee N.I. Rates
2021/22: 12% from £9,564 to £50,270 p.a. and 2% above that.
2022/23 from July: 13.25% from £12,570 to £50,270 and 3.25% above that.
Amount Payable p.a.
Salary | 2021/22 | 2022/23 |
£20,000 | £1,252 | £984 |
£25,000 | £1,852 | £1,647 |
£30,000 | £2,452 | £2,309 |
£35,000 | £3,052 | £2,972 |
£40,000 | £3,652 | £3,634 |
£45,000 | £4,252 | £4,297 |
£50,000 | £4,852 | £4,959 |
£55,000 | £4,979 | £5,149 |
£60,000 | £5,079 | £5,311 |
When lenders factor in the new rates to their affordability assessments the impact will be marginal, but slightly positive for anyone earning up to £40,000.
However, even for those earning over £40,000 p.a. other negative factors will be far more important, such as:
- Increased energy and food costs
- The increased interest rate used for the stress test to reflect last month’s 0.25% increase in Bank Rate
- The probability of further Bank Rate increases over the next few months - probably mitigated later this year by a likely positive regulatory change in the basis required for the stress test calculation when the Financial Policy Committee (FPC) of the Bank of England eventually stops kicking the can down the road
However, for a significant number of mortgage applicants, in particular those without other large financial commitments - e.g. loan/credit card repayments or maintenance payments, the maximum loan available is unlikely to be reduced, even with the additional cost of living factored in. This is because the maximum loan is based on the lower of the affordability test and the maximum income multiple available.
The most common determining factor for the maximum loan is the income multiple rather than the affordability assessment. Although increased essential expenditure will exceed the benefit of any salary increase for most borrowers, in many cases the affordability assessment is still likely to indicate a higher maximum loan than a lender’s income multiple limit and hence the maximum loan available won’t change, although the gap between the figures will narrow.
A key reason why the income multiple limit is most commonly what dictates the maximum loan, rather than the more logical affordability test, is the FPC requirement for lenders to limit the maximum loan to 4.49x income for at least 85% of their purchase customers. The effect of this is that lenders have to decide which of their customers to limit the maximum loan to less than they consider affordable.
Because the FPC income multiple restriction has the effect of building extra head room into the maximum loan for many borrowers, a more onerous affordability test does not reduce the maximum amount available for these borrowers. The applicants most likely to be offered a lower maximum loan are those with above average financial commitments or with expenditure higher than the ONS averages.
Category: Ray Boulger
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