Location matters

People buy their first home to change their lifestyle, sometimes radically. ?Many of these changes are driven by location and affect their daily budget. ?Banks help facilitate these changes but ignore them when assessing affordability. Our daysrent? system takes location into account. Read on to find out why.

Many people buy a home to couple up and settle down. Don't take my word for it. Ask them. The Department of Housing's annual English Household Survey suggests that some 42% of households that rent from private landlords do so as part of a couple. The corresponding figure is 71% for households paying off a mortgage.*

Couples living in two separate households before they move in together would expect their income to remain unchanged while their expenses fall. All else being equal, coupling up gives mortgage applicants the capacity to borrow more. Yes, this is not rocket science but tell that to the mortgage banks.

Helping people buy the sort of home they can afford to rent is risky, apparently. Thankfully, banks are “effectively” barred from lending more than 4.5x the applicant’s income. There are rare exceptions but the average for first-time borrowers is about 3.5x, according to the industry body, UK Finance.?

The rules dictate that spending power is established by analysing earnings in the past.? Once the applicants reach the loan-to-income cap, their spending power going forward becomes irrelevant, even if their headroom is about to rise materially. The data required to determine whether it's safe to lend more to people who are about to change their lifestyle comes from an unusual source. I won't spoil it. Please keep reading.

One of those predictable location-driven changes is the cost of commuting. Getting to and from work hundreds of times a year can chew up a lot of money. Let’s crank through the numbers.? Pencils at the ready.? Commuters who drive to work spend an average of ￡17 a day. One can bump that figure to about ￡25 per day to adjust for the likelihood that the commuter is part of a two-person household. ?Then let’s reduce this by ￡2 a day to represent a modest fall in the cost of commuting.

Outside London, a typical monthly rent might be ￡40 a day. So, plausibly, coupling up might save an amount equivalent to 5% of the couple's largest monthly expense. If the amount you could borrow was a function of the amount you can afford to repay, our hypothetical couple ought to be able to afford 105% of the typical loan.

Here's the punchline. It takes years to save a 5% deposit

Once you are at the loan to income cap, the only way to buy a home worth 5% more is to save more and take the risk that house prices rise. With me so far?

This is just one small example. Commuting into a big city with a train season ticket is expensive. Running two cars is expensive. Moving closer to work might save an amount equivalent to 5% of your rent.? Then there's the trend towards working from home and hybrid working. In addition, thanks to the loan to income cap, for some renting is cheaper than repaying a mortgage, which in turn makes the savings from coupling up greater than 5% of the amount required to repay a loan.

If you’ve read this deep into the article, you’re thinking there has to be a better way.? As luck would have it, there is.? We’re on a mission to help renters become owners. Our daysrent? purchase plans are modified lease agreements that are greatly superior to conventional mortgages as applicants can closely tailor them to meet their needs.

We start the process by asking applicants just two questions: where would you like to live and how much do you feel comfortable paying per day for the privilege? Expressing costs in daily amounts helps applicants make common sense "kitchen table" evaluations of their daily budget. Well designed calculation tools can help a motivated applicant evaluate that incremental ￡2 a day without paying for expensive advice.

Our forward looking analysis is quite sophisticated so keep that pencil handy.? We can ascertain the likely cost of commuting to work by asking the applicant. This involves gathering a lot of private data to store in a compliant way. We need to know where they want to live, how they get to work, and whether there are any changes in modality (planes, trains, automobiles) and cost compared to the status quo.

Don't laugh. If your credit department evaluates affordability before the applicant decides where to live, this sort of in-depth analysis is not possible. And one can only imagine the challenge of training mortgage brokers to use Google Maps.

Using daysrent? as a metric we cap our plans at 14,610 points.? That’s forty years in the old money.? Our system regards this extra ￡2 a day as an incremental thirty grand.? Properties are priced in brackets. It’s possible that most of the three bed terraced houses the applicant wants to buy lurk just beyond the reach of their preliminary mortgage offer. If so, a 5% increase in spending power might double the number of properties within the applicant's multi-constraint Venn diagram: budget, location, number of beds, baths, type of home, outdoor space...

Our platform lets applicants take the risk of adding ￡2 a day to our search engine to find out if any additional attractive properties pop up. They can even try looking at different neighborhoods, but that's a story for another day.

Where would you like to live and how much do you feel comfortable paying? Two questions banks and mortgage brokers don't ask.

People affected by these issues should feel free to reach out.

Ike Udechuku | Cofounder | The Pathway Club

* Side note, the corresponding figure for people who rent from local councils and housing associations is just 29% but banks rarely lend to those folks.