MRT1 LO6: Affordability, suitability and fair mortgage advice

LO6 is the heart of the CeMAP® MRT1 unit. It asks you to understand what a mortgage adviser does and how advice delivers a fair outcome. The seven assessment criteria fit together: an affordable loan, a suitable product, an explanation of the risks, the right term, ethical conduct, verified information, and a solution that fits immediate and long-term needs.

1. Affordability (AC6.1)

Affordability is the lender's legal responsibility, but the adviser must understand it to recommend products the customer can actually obtain.

The core rules

1. MCOB 11.6.2R: before entering into or varying an RMC, assess whether the customer (and any guarantor) can pay, and do not proceed unless the lender can demonstrate affordability.
2. MCOB 11.6.5R: the assessment uses
   • income net of tax and National Insurance;
   • committed expenditure (credit commitments and other contractual obligations);
   • basic essential expenditure and basic quality-of-living costs of the household.
3. It must not rely on equity in the property or expected house-price growth.
4. It is based on a capital and interest repayment basis, unless a compliant interest-only loan is being assessed.
5. MCOB 11.6.14R: take into account likely future changes to income or spending, such as retirement or known redundancy.
6. MCOB 11.6.18R: consider rates over at least five years (unless fixed for five years or more), with a rise of at least 1%.

Worked example: the rate stress

A customer wants £200,000 over 25 years on a 2-year fix at 4.5%.

Rate	Monthly capital-and-interest payment
4.5% (pay rate)	£1,111.66
5.5% (pay rate plus 1%)	£1,228.17

The lender must be satisfied that the customer can meet about £116.51 a month more than the starting payment. Because the fix is shorter than five years, the stress applies.

Ratios lenders and regulators use

• Loan-to-value (LTV) = loan divided by property value. A £225,000 loan on a £250,000 home is 90% LTV.
• Loan-to-income (LTI) = loan divided by gross income. £225,000 on £50,000 income is 4.5x, so this loan counts towards the 15% market limit on lending at 4.5x LTI or more.