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Are you confused by new mortgage rules?

Are you confused by new mortgage rules?

Category: Mortgages

Updated: 02/05/2014
First Published: 28/04/2014

MONEYFACTS ARCHIVE
This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

New mortgage affordability checks came into force over the weekend, and that means it could potentially be a whole lot harder to get the mortgage you're after. But just what do the new rules mean?

There seems to be a lot of confusion surrounding things, with research revealing that almost three quarters of aspiring homeowners don't know what the Mortgage Market Review – or MMR – actually is.

The MMR confusion

The research, carried out on behalf of Experian, found that 72% of prospective buyers are unaware of the MMR and the resulting changes taking place in the mortgage market, and even those that claim to understand are largely ill-informed as to what it all actually means.

For example, 43% of those who have heard of the MMR think it means they'll be able to apply with a smaller deposit – when actually the reverse is more likely to be true – while 19% think that lenders will relax their lending criteria, when in fact the rules mean that affordability checks are becoming even more stringent.

Just 15% are aware that they'll need to speak to an adviser before being able to get a mortgage, while 55% feel more confident in their ability to be accepted following the changes – confidence that is perhaps misplaced, particularly given that 49% confessed to overspending in the last month.

Just what is the MMR and what will I need to do?

Essentially, the MMR has set about changes to the mortgage market with the overall goal being to ensure lending is more responsible and stable, with a much stronger emphasis on affordability – both now and in the future, a fact which only 44% of respondents were aware of.

Borrowers need to prove that they'll be able to afford the repayments with mortgage rates at their current levels, but they'll also need to show that they've considered how to manage their repayments in the long-term when rates have increased. This means there'll be additional "stress tests" that prospective borrowers need to go through to make sure that they'll be able to comfortably afford bigger monthly repayments.

As such, larger deposits rather than smaller ones would be preferable to ensure mortgage repayments are more manageable, and borrowers will need to be prepared to have their budgets thoroughly scrutinised. Lenders need to be a lot more careful about ensuring that applicants can afford their repayments and will go through spending in minute detail to ensure that, so if you overspend or heavily dip into your overdraft (something that affects 8% of respondents) then you could face problems.

In order to stand the best possible chance of having your application accepted, it's all about being prepared. You'll need to make a clear, six-month budget covering all expenditure – absolutely everything – as well as your income, and make sure your finances are in as good shape as they can possibly be.

Start by trying to clear off outstanding debt and, if you live from paycheque to paycheque, look for ways you can make cutbacks – and don't be one of the two-thirds that aren't planning to cut down on luxuries in the run-up to the application. Everything from holidays to meals out will be taken into consideration, and although 14% think they can't cut down on their outgoings any further, chances are you'll be able to make a few changes if you looked hard enough.

Those that aren't prepared to make a few sacrifices could find themselves in difficulty, either by getting a smaller mortgage than they expected or being refused outright. A little preparation now can pay dividends in the future, so make sure to spend time preparing your finances – and learning more about the MMR – and you can approach lenders with confidence, free from confusion and ready to prove your financial standing.

MMR CHECKLIST

A quick overview of what you'll need to show lenders when you make your application.

Evidence of income:

  • Payslips, usually covering the six months prior to your application
  • Evidence of any overtime, bonuses or other allowances
  • Other income such as maternity pay
  • Evidence of any tax credits/state benefits
  • Evidence of income received from investments or rental property
  • Retirement income, if applicable
  • Bank statements as further proof, again up to six months' worth

A detailed record of outgoings, including:

  • Payments for utility bills
  • Evidence of unsecured loans, credit cards or hire purchase agreements, complete with usual monthly repayments
  • Payments towards lending secured against your house
  • Council tax
  • Child maintenance payments and/or childcare costs
  • Essential travel costs i.e. to school or work
  • Buildings and contents insurance
  • Any other insurance payments (e.g. health or life insurance policies)
  • Ground rent or service charges, if applicable
  • Housekeeping, including food and money spent on cleaning services (for example)
  • Telephone, TV and broadband payments
  • Entertainment, including money spent on cinema trips, restaurants etc.
  • Holidays
  • Regular savings or private pension contributions

What next?

Find the best mortgage deal using our mortgage calculator

Looking to speak to someone direct? - Check out our whole of market mortgage advice service

What does the MMR mean for you?

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.

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