April 26th will mark the introduction of the Mortgage Market Review (MMR), launched by financial services regulator the Financial Conduct Authority (FCA).
But what is it and, more importantly, how does it affect buyers and homeowners? We answer some of the most-asked questions.
The story so far
In 2007 house prices across the UK were on the up and people were keen to invest in a home of their own. Relaxed lending rules meant some buyers were able to borrow very large sums of money, which gave them a good chance of securing their dream home. However, because fewer checks were carried out by lenders to make sure they could afford the repayments, some of these buyers may have then struggled to keep up with their mortgage.
Following the credit crunch and property market crash, financial regulators have worked hard to make sure that lenders lend responsibly. While you may not be able to borrow as much as you once could, you now have the peace of mind of knowing that your mortgage provider has carefully assessed your situation and believes you should be able to comfortably afford your mortgage.
What do the new rules mean for buyers?
The MMR affects three groups within the mortgage industry: lenders, brokers and consumers. Among the consumers, anyone looking for their first home, a new property or a new mortgage will be affected, but how?
Well, if you’re applying for a mortgage you’ll have to provide proof of earnings, such as your most recent payslips, to support how much you say you make. This will help lenders work out exactly how much you can afford to borrow based on your income.
You’ll also have to answer questions from banks and building societies about your monthly expenses to help determine whether you can comfortably keep up with your mortgage repayments. Questions will vary from lender to lender, but it’s almost certain you’ll be asked how much your monthly utilities and council tax are; whether you make regular debt repayments; if you have childcare costs and what your other basic living costs are. And there are already examples of some lenders delving much more deeply - asking how much applicants spend each month on eating out, on their pets, or their beauty regime.
Lenders not only need to establish that you can afford the loan now, but also that it will remain affordable if interest rates go up, or if your circumstances change. They will assess this through what’s known as “stress testing”: seeing whether the borrower can afford repayments if interest rates push them up.
What about remortgaging?
Anyone considering remortgaging their current home will also be subject to the MMR rules. While the reasons for remortgaging are very different to the reasons for getting a mortgage to move house – for example, you might want to spend the money on home improvements or to consolidate your debts – you’ll still have to jump through the same hoops as you would if you were buying a new property.
The good news is that regulators are keen to make the process as smooth as possible for homeowners. If you have a mortgage but would like to remortgage, perhaps to change to a fixed rate, you’ll have to answer questions about your earnings and outgoings just like any other buyer, but your lender should be able to accommodate you – as long as you’re not trying to borrow more than your current mortgage is worth.
Good and bad news
There are some critics who warn that the introduction of these new guidelines will be bad news for the property market. The checks may mean it takes longer to secure your mortgage, especially as everybody gets used to the new rules, which could slow down the buying process. In some cases this may mean people being told they can’t borrow as much as they’d hoped. However, there’s good news for buyers too.
For one thing, MMR should make the mortgage market fairer and safer. The changes are designed to help stop borrowers over-extending themselves financially, with all the worry and stress this can cause. If they help cut the number of people who are struggling with a mortgage payment they can’t really afford, or who actually lose their home, then this will be a good thing. Because lenders now have to go to such lengths to make sure you’re able to pay your mortgage each month and afford all your other outgoings too, this should be less of a risk. This could make taking out a mortgage a little less daunting.
Further good news is that it’ll be standard for borrowers choosing a mortgage to receive advice from someone who knows what they’re talking about and has the qualifications to prove it. This will help them select the best product for their needs with the assurance they shouldn’t struggle to repay it.
If you’ve been thinking of looking for a mortgage or remortgaging, don’t panic. Some banks and building societies already ask detailed questions about borrowers’ finances, and some already use stress testing. Because these elements of MMR are already in use, the changes when it’s officially introduced might not be that dramatic.
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Intelligent Lending Ltd (Credit Broker). Capital One is the exclusive lender.