Ability to Pay

Ability to Pay is a method or system which calculates how much someone has left from their income to make the loan or mortgage payments.

FSA lending rules say that “a firm must put in place, and operate in accordance with, a written policy setting out the factors it will take into account in assessing a customer’s ability to repay”. So mortgage lenders should assess the customer’s ability to repay; they cannot rely on non-specific assessments or assurances whether made by the customer or others such as intermediaries. The factors used by the mortgage lender must be formally documented in a written policy.

This ability to pay should include the customer’s “actual or reasonably anticipated income” and “the level of both initial and subsequent repayments”. So, mortgage lenders should consider affordability both at the start of loan and after any changes in circumstances which could be reasonably anticipated. If a mortgage stretches beyond the borrower’s expected retirement age, a fall in income after retirement might reasonably be anticipated and so ability to repay in retirement should be assessed.

Providers are required to make affordability assessments for each customer, before entering into a regulated mortgage contract with them. A mortgage lender cannot limit assessment of affordability in retirement to certain categories (e.g. those over a certain age or those with mortgages stretched more than a certain number of years beyond retirement). They must assess the position of all customers who could reasonably be anticipated to face changed circumstances upon retirement.

In making this affordability assessment, providers can base their decision on information provided by the customer, an intermediary or any other person, if it is reasonable to do so (MCOB 2.5.2R). In assessing whether it is reasonable to rely on information provided, firms might want to consider whether they have reasonable grounds for doubting the information provided.