If you're thinking of buying your first home, do you know all the hurdles you need to get over in order to prove you can afford the mortgage? Proving affordability is vital, and following the introduction of the Mortgage Market Review (MMR) last year, it's proving to be a difficult task for many. This is compounded by the fact that some borrowers don't even know that the rules have changed, which is why it's so important to know what to expect.
According to research from Ocean Finance, 31% of potential homebuyers aren't even aware that mortgage affordability rules changed last year, and a further 35% are confused by them. This means that over two-thirds of borrowers are leaving themselves at risk of being caught out by the new rules, and if they don't prepare effectively, they may find it difficult to get the mortgage they want.
Essentially, the new rules mean that lenders need to be absolutely certain that a borrower can afford the mortgage, not only now, but crucially, when mortgages rates start rising. This means that lenders will go through any applicant's expenditure with a fine tooth comb – they'll analyse bank statements and will expect proof of income and outgoings, and everything from spending on bills and childcare to holidays and entertainment will be scrutinised.
However, 70% of those surveyed weren't aware that lenders would need this kind of information, and a quarter said they haven't changed their spending habits to help them qualify for a mortgage. This could make it even harder to be accepted, because if you're even a slight affordability risk – or if your credit score isn't up to scratch – you won't get the mortgage.
Many who are aware of the need to prove affordability have taken measures to reduce their spending, but some have taken more extreme steps than others. More than a fifth have made the sensible choice and reduced their spending on treats, but worryingly, many have also stopped contributing to life insurance policies and even their pension in order to keep more cash in the bank.
This may not be ideal, as although you need to reduce your spending as much as possible, you don't want to put your long-term financial security – or that of your family – in jeopardy in the process. A far better plan is to look for simple things you can do to cut costs, such as foregoing treats or switching to a cheaper energy tariff, so you can show you're making headway and are serious about affordability.
It's also important to educate yourself thoroughly on what the rules mean, and what you can do to ensure you meet the criteria. For example, just 24% of respondents knew that the rules test their affordability in the face of higher rates, and even fewer (16%) knew that their ability to withstand changes to their personal circumstances would also be tested. Don't be part of the majority that isn't informed!
Happily, a fifth of potential buyers have taken the sensible route and sought advice from an independent mortgage broker, but almost 30% have stuck to online information and 14% have relied on friends and family, while a third haven't sought any advice at all upon applying for a mortgage. This is something that should never be an option – seeking advice is key to ensuring you're properly prepared, and can make all the difference between securing that mortgage, and seeing it slip away.
"More than a year after the new mortgage rules were introduced, potential buyers are still in a state of confusion about what they mean in reality," said Gareth Shilton, Ocean Finance's spokesperson. "Even more worrying is that a large chunk of people who are gearing-up to apply for a home loan are not even aware that the mortgage rules have changed.
"For anyone who plans to apply for a mortgage in the next year, it's key that their finances are in order, including checking their credit file and gathering all their paperwork early to show as evidence. They would also be wise to cut back on non-essential spending such as takeaways and subscriptions, and to ensure that bills are paid on time so they demonstrate that they can consistently live within their means and stick to a budget."
It may take a bit of financial re-jigging and plenty of organisational skill, but if you start to prepare and know everything you can about affordability rules, you could be one step closer to securing that first-time mortgage.
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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