The Responsible Lending Review


The Responsible Lending Review

A bit of background…

If you’ve bought a house in the last year or so, you’ll probably know about the Mortgage Market Review (MMR). This was a new set of rules introduced in April 2014 by the Financial Conduct Authority (FCA) to make the mortgage market fairer and more responsible.

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What changed?

After the initial review was carried out, the FCA concluded that the market was not working as well as it could be because some customers were being allowed to borrow large sums of money that they couldn’t really afford to pay back. So, the main aim of the new rules was to put a stop to what was seen as high risk/irresponsible lending.

The changes placed a lot more responsibility on the lender, for example, they now have to make more in-depth checks to assess whether or not someone can afford a mortgage. They’ll ask for proof of earnings in the form of payslips, asking questions about monthly expenses, such as your household bills, memberships to gyms, childcare costs and so forth. Some lenders ask even more detailed questions, such as how much you spend on your pets, eating out or on clothes each month to make sure you can afford to repay the loan now, and in the future if interest rates go up.


The next step

The good news is that these changes haven’t just been made with no follow up checks planned to see if they actually work. The Responsible Lending Review is the next step, and will look at how well lenders are doing at implementing the new rules.

It will look at two things:

-          The mortgage lenders - to check they have understood the new rules properly, and to see how they are applying them.

-          Market research – to gather factual evidence to see how the changes have affected the customers (pre and post the changes).


What it means for you

Some critics of the MMR have said that it’s made getting a mortgage harder for certain people, so a review will be welcome news for them. In April 2014 The Telegraph has reported on the effects of the Mortgage Market Review since its launch stating:

  • It has taken longer for a mortgage to be approved due to the affordability tests
  • Fewer mortgages have been approved. In Feb 2014 there were 22,300 first time buyers and now a year later there are 18,700. The figures of second time buyers are down from 26,200 to 21, 900 as well.
  • There are some people that find they have become “mortgage prisoners” as their mortgage provider won’t let them change their existing mortgage deal even though they have a perfect payment record, even if it reduces the risk to the lender. Or they find they cannot get a mortgage because their mortgage lender is concerned that their mortgage term would run past their retirement age.


To explain the last point a little more, the term “mortgage prisoners” has been used to describe people who want a new re-mortgage deal but are rejected for one because they don’t satisfy the criteria brought in by the MMR.

One way around this problem for customers is to use “transitional arrangements” set out by the FCA to bypass the affordability tests and take personal circumstances into account more. The FCA have said that the Responsible Lending Review will look at transitional arrangements, whether lenders have been using them fairly and how the new rules have affected existing customers. Hopefully, this means that they will be checking that the rules haven’t had an unexpected negative effect for some homeowners.

Overall, the fact that the FCA is focussing more on positive customer outcomes and responsible lending should prove to be a good thing in the long run. Although we did see a dip in the number of mortgages that were approved just after the rules were enforced, this may have been due to teething problems as new reports show that the numbers of mortgages being approved is now recovering.