Mortgage rules tightened up

The rules on mortgage lending have been tightened up recently.

The changes introduced in April initially led to a fall in mortgage approvals but the numbers have started to bounce back.

So how will the new framework affect you?

Taking out a mortgage is one of the biggest financial transactions many of us will ever make. The process can also be a daunting one.

However, the changes mean that the application process has now become even more in-depth, and certain people – particularly those who are self-employed – are likely to find their applications scrutinised even more than they were previously.

There is no need to panic, though. People who can afford a mortgage are just as likely to secure a deal, even though the process might take a little longer than it did before.

 

Why has there been a change?

Many of the problems that led to the financial meltdown of 2008 had their roots in mortgage lending. It was mainly the fault of the banks rather than consumers – lenders were chucking vast amounts of money at people who had no chance of keeping up with their repayments.

When the number of defaults went up – particularly in the sub-prime market – the wheels came off, and we ended up in a financial mess that has still not been entirely sorted out.

One of the responses from the government has been the so-called mortgage market review (MMR). Under the MMR, lenders are now required to undertake a more thorough review of an applicant’s income and expenditure before agreeing to offer a home loan.

Previously, someone applying for a mortgage could often get away with providing proof of income. Self-employed people could self-certify their income, and basic evidence of what they had recently earned was often deemed sufficient. More proof about future income is now required.

Meanwhile, just because a mortgage applicant is bringing in £1,000 a week doesn’t mean he can afford a mortgage. If he is paying out £1,200 on living expenses and loan repayments, the fact he earns £1,000 becomes irrelevant. He won’t be able to afford a mortgage.

“The MMR has tried to put some common sense back into lending, requiring borrowers to provide more evidence of both their income and their day-to-day expenditure,” said Charlotte Nelson, of Moneyfacts.co.uk

“This move protects both the lender and the borrower, focusing on the affordability not just now but in the future, and stopping people borrowing too much.”

Implementation of the MMR has caused a slight rise in borrowing rates. Because the application process is taking longer, lenders have found their costs have increased and these costs are ultimately passed on to us.

But Andrew Hagger, of Moneycomms.co.uk, said it was a small price to pay for what was a sensible change in the rules.

“While it may make it harder to get a mortgage in some of the more borderline cases where disposable income is tight, for most people it just means the mortgage interview will take a bit longer than it does now as the lender has more questions it needs to ask,” he said.

“It is designed to ensure that potential borrowers have the financial capability to afford their monthly home loan repayments now, and also as and when interest rates rise in the future. It’s nothing more than common sense and something that should have been put in place years ago.

“A few more people may be turned down for a mortgage, but if that prevents them going through the major financial stress and heartache of having their home repossessed a couple of years down the line then surely that’s a good thing?”