Will we decline a quarter of IP applicants on their income source?

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In the United Kingdom it has been found that 28% of adults with complex incomes are denied a home loan.¹

Monday, July 29th 2024, 6:00AM

by Russell Hutchinson

What is complex? That includes some on zero hours contracts and many self-employed people. For people on zero hours contracts the acceptance rate was worst of all: 46% would have a mortgage application declined.

That would severely penalise a household where an application was for a couple, one of whom is on a zero hours contract, not uncommon for someone who is on call – think of a filling in teacher.

We believe that these people have all passed a basic income-adequacy assessment – meaning that the mortgage adviser, or frontline banking staff member, who was processing the application believed that in volume alone the level of income was sufficient to service the debt.

The declines will arise from some other form of assessment criteria.

It can clearly be inferred from the fact that just over half of these clients were approved that, say, a zero-hours contract itself does not automatically disqualify the client from acceptance.

Combine those facts and we are left with the issues of income volatility and whether the level of income could be proven to the satisfaction of the lender, while within the patience and capability of the borrower.

We have a similar problem with complex incomes when it comes to the provision of income protection insurance for individuals, and business continuity cover for organisations.

For insurers, the relationship between income and benefit is important.

If, while on claim, the insured believes that their earning capacity is low, then motivation for a speedy recovery will likely be low too.

That condition could automatically be created should the insured be, say, injured, while in a slow patch in their work.

This suggests that a different approach should be offered to those with fluctuating incomes. Some ideas we identified from the review of the UK mortgage/home loan market include:

1. Investigations: income fluctuation is probably the determining factor, not whether the client is deemed ‘self-employed’. We suspect that some ‘employees’ have higher risk because of income variability, while some self-employed people have risks more like employees if their business is well-established and stable.
2. Risks: designing policies by covering everything and then excluding what we do not wish to cover, or cannot reasonably cover, is an efficient form of documentation. It is also under attack from dispute resolution services that are campaigning for a definition of ‘fair’ which may set aside our policy documents in favour of a wider view. If successful, excluding mental health problems for example, or conditions with ‘self-reported symptoms’ to give another, may well not be possible.
3. Claim design: to tackle some of the risks, we could take a leaf out of the digital insurance world and opt for a more parametric approach to income insurance for those with fluctuating incomes, offer only shorter benefit periods, or offer differential claim definitions such as in Asteron Life’s workability product.

¹Reference: Quarter of adults with complex incomes denied a mortgage | Mortgage Strategy by David Burrows on the 3rd of May in Mortgage Strategy

Tags: Russell Hutchinson

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