Mortgage lenders could now be grilling aspiring homeowners with all kinds of obscure and hypothetical questions, according to the new mortgage rules that were released by the Mortgage Market Review (MMR) last month. But it’s not without good reason, as the tougher rules aim to enforce existing regulations that slipped and encouraged the excessive lending of the housing market boom before the recession in 2008.
So What Exactly Are the New Rules?
The main drive is to assess affordability, and there are many ways that lenders are calculating this. One of the main ways is by assessing the incomes of prospective buyers as well as their earning stability. This means that applicants will have to provide evidence in the form of payslips, annual P60 forms, tax returns, audited accounts, bank statements, business plans and projected earnings. If you thought that was enough paperwork, think again. Lenders may also want to see details of shares, investments, bonuses and pension documents too.
Although interest rates are currently at a record low, lenders are set to make sure that applicants can afford to keep up repayments when interest rates start to rise again. This may sound hypothetical but it’s all about risk assessment and focusing on responsible lending. Considering the fact that the Bank of England interest rate has fluctuated between 7 and 0.5 percent in the past 18 years, it’s important for both lenders and borrowers to be prepared if interest shoots up. Just a 2 percent rise can mean hundreds of pounds on top of payments every month.
The reason you should ask yourself whether you can afford a 7 percent mortgage if you’re an aspiring applicant or currently a tenant with home owning dreams, is because some lenders are ‘stress-testing’ the affordability of borrower’s applications from 6.5 to the highest rates of 7.5 percent.
The flip-side is providing evidence of your spending habits. This is the side that people find the most intrusive as lenders can ask for very detailed accounts. According to the Financial Conduct Authority (FCA) categories of spending are split into three types; essential expenses, basic quality of living and repayments and commitments. Applicants will be asked to provide evidence of how much they spend on all these categories which can range from household goods and bills to leisure costs and hire purchase payments. Mortgage brokers use this discretionary information on spending to calculate a debt-to-income ratio and help them decide whether applicants can afford to keep up repayments according to forecasted interest rates.
Why Is It Harder To Get a Mortgage Then?
It’s simply harder to get a mortgage because there’s a tougher test to pass, which requires research, responsibility and long term predictions and commitments. People are now forced to think even harder about how they manage their finances and will perhaps uncover skeletons in the closet that they would rather not address. This is a move to reform the lenient practices of the past, as Martin Wheatley, chief executive of the FCA said, "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."
In a nutshell, fewer people will be able to qualify for a mortgage because fewer people will pass the strict affordability tests. It may be more stressful and time-consuming to handle all the paperwork, forms, legal jargon and regulations with increasingly busy lifestyles and financial pressure but in the long-run, the theory is that the regulations will help homeowners and lenders to be more secure.
The problem arises for people who are currently renting and would love their own home where they can finally paint the walls because their dream might be further away then they think.
What Are The Options?
If you’d love to own your own home in the next few years or just can’t wait to settle down and get your hands on a property then it’s worth considering your options and being well-informed about what exactly you can do to secure a mortgage deal. Although buy-to-let mortgages are not directly affected, landlords and letting agents could see an increase in interest in the rental market as people have no choice but to rent for longer if they can’t qualify for a mortgage loan.
But it’s not all doom and gloom, as Martin Totty, CEO of Barbon Insurance Group says, “The flexibility of renting a home means tenants are able to move into a new home within weeks. It’s an alternative housing solution for a range of people and it’s increasingly the preferred choice of many.” There are many benefits to renting as people who want to live a relatively affordable and light-weight lifestyle in popular city centres often find that renting is the best option.
Assess your situation and what is important to you. Don’t be put off by the mortgage rules, even though my might have got a lot of bad press, they’re actually there to ensure that you won’t find yourself in a pickle and struggling to keep up payments. Find a great lender that understands you, work carefully to manage your money well and who knows, your home owning dreams could be within reach.