What The New Mortgage Rules Mean To You
Before the financial crisis, the housing market was booming, sales were frequent, and lenders were keen to advance individuals a mortgage. In some cases, potential buyers were able to borrow the full price of a home, and a loan on top, then initially just pay back the interest.
When property prices fell, many found themselves in negative equity. Many who lost their jobs or had hours reduced also found they had overextended themselves when borrowing for a mortgage and struggled to make repayments.
The City regulator, the Financial Conduct Authority (FCA), has introduced new regulations to ensure the most extreme cases are not repeated.
"In the past too many people got a mortgage by simply telling their lender they would have no problem repaying their debt, and that was that," said Martin Wheatley, chief executive of the FCA. "Our new rules will hardwire common sense into mortgage lending."
However, there are concerns about the implementation. A stricter interview could mean lenders ask more delving questions about an applicant's lifestyle and the whole process could take longer. That could extend the amount of time it takes to move home. Some people could find that they might have been able to get a mortgage previously, but now discover that the lender is only prepared to offer a smaller amount, or may reject the application completely. This will not only affect first-time buyers, but also those looking to remortgage.
One reason for this is that a lender has to "stress test"; a customer's ability to repay if interest rates were to rise. The Bank rate is at a record low at the moment, so mortgage rates have also been low for some time. A lender, who might be offering a mortgage with an interest rate of less than 4% now, will have to decide whether an applicant would be able to make regular repayments if the rate rose to something like 7%.
In order to decide, the lender will not only take account of income, but of outgoings too.
What questions could you be asked?
The lender is interested in how much money is spare in a borrower's personal budget. So any regular payments could be asked about in the application process. This could range from the cost of regular haircuts, gambling and club subscriptions and deliveries, to holidays, travel season tickets and childcare.
Borrowers will also be expected to say if their financial position is expected to change. That could include any predicted changes in income or working hours, but might also include any plans to have children in the near future.
Many lenders had already implemented the new rules, so borrowers might recognise some of these questions already. The Council of Mortgage Lenders says the transition to the new rules will be "smooth".
What suggestions are being made to applicants?
Brokers say it will be important to have a household budget clearly worked out before starting the application process. They say that lenders are likely to ask for a number of documents that prove income and outgoings figures, such as payslips and bank statements. They say it is important to send all these documents together in one go when they are requested; otherwise the process could be delayed further.
Some also suggest "cleaning up" a household budget. So cancelling an unused gym subscription could be a good idea before making a mortgage application.