Affordability is the spine of CF6. Product knowledge earns marks, but the responsible lending rules earn more, because every case study eventually asks whether the loan should be granted and on what basis.
Who assesses affordability
The lender does. That is a distinction the exam tests directly. An adviser assesses suitability and must not recommend a mortgage the borrower is unlikely to be able to afford, but the affordability assessment itself is the lender responsibility and cannot be delegated to the intermediary or to the borrower.
Self certification of income is prohibited. The lender must take reasonable steps to verify income, and it must not rely on a borrower statement alone.
What goes into the assessment
| Component | What the lender must consider |
|---|---|
| Income | Verified gross and net income, with evidence appropriate to employment status |
| Committed expenditure | Credit commitments, loans, credit cards, child maintenance, other contractual payments |
| Basic essential expenditure | Food, utilities, council tax, insurance, transport, essential travel |
| Basic quality of living costs | Costs that are hard to reduce quickly, such as childcare, clothing, recreation |
| Future changes | Known and likely changes such as retirement within the term, a fixed rate ending, planned reduction in hours |
Basic essential expenditure and quality of living costs may be estimated using statistical data, but the lender must use realistic figures rather than an artificially low allowance.
Income evidence by borrower type
- Employed, recent payslips, bank statements and often an employer reference, with policy limits on how bonus, overtime and commission are treated, commonly a percentage or an average over two years
- Self employed sole trader or partner, two or three years of tax calculations and tax year overviews, or accountant certified accounts, usually averaged or taken at the lower figure where income is falling
- Company director, salary plus dividends, and some lenders will use retained profit
- Contractor, day rate annualised, subject to contract history
- Other income, pensions, rental profit and benefits, accepted at lender discretion
Stress testing
The lender must consider whether the borrower could still afford the payments if interest rates rose during the first five years of the mortgage. The test uses a market expectation of rates, subject to a minimum assumed increase of one percentage point, and lenders commonly apply a stress rate well above their product rate. Where the mortgage has a fixed rate of five years or more, the stress test is not required for the fixed period in the same way, which is one reason longer fixes can improve borrowing capacity.
Interest only
Interest only lending is permitted only where there is a clearly understood and credible repayment strategy that does not rely on an assumption that the property value will rise. Acceptable strategies typically include:
- Sale of another property or an identified investment
- Regular savings or investment plans, evidenced and reviewed
- Pension tax free cash, subject to lender policy and evidence
- Sale of the mortgaged property, but only where there is sufficient equity and, for retirement interest only, an appropriate arrangement
The lender must check the strategy at outset and review it at least once during the term. Retirement interest only mortgages have no set end date and rely on sale on death or a move into long term care, and they are assessed on the borrower ability to pay the interest from retirement income.
Lending into retirement
Where the term extends past the expected retirement date, the lender must use the income the borrower will have in retirement, evidenced with pension statements or a state pension forecast. A case study that shows a fifty five year old asking for a twenty five year term is testing this point, not the product choice.
Transitional arrangements
Existing borrowers who cannot meet current affordability rules are not permanently trapped. A lender can choose not to apply the full assessment where the borrower is not increasing the total amount borrowed and the new arrangement is in their best interests. This is why an existing customer moving to a cheaper product can proceed even where a new applicant on identical figures would fail.
Where candidates lose marks
- Saying the adviser assesses affordability
- Forgetting the minimum one percentage point stress uplift
- Accepting an interest only strategy based on hoped for house price growth
- Ignoring retirement inside the mortgage term
- Overlooking committed expenditure, particularly child maintenance and existing credit
Turning it into an answer
State the income used and the evidence for it, state the expenditure deducted, apply the stress rate, and then state the conclusion with a recommendation. In a case study, that structure earns method marks even when your final figure differs slightly from the model answer.