The mortgage market is booming, with record-low rates and increased availability of 95% loan-to-value (LTV) mortgages meaning more people are able to get on – or move up – the ladder, whether or not they've been able to save a large deposit.
However, there are fears that this could change with the implementation of the Mortgage Market Review, or MMR, due to come into force later this month. Under the new rules, lenders will have to apply increasingly strict criteria when considering mortgage applications, fuelling concerns that fewer people be accepted – and that could potentially have an impact on the level of activity in the market, not to mention your ability to get a mortgage.
To help you understand the MMR and the potential consequences, we've put together a quick overview of the new rules and what they could mean for you.
The MMR was a comprehensive review, conducted by the Financial Conduct Authority (FCA), into the state of the mortgage market. The review came about after the property market crash when it was found that there were too many instances of high-risk lending and borrowing prior to the crisis, which led to many people being left in financial hardship when they couldn't afford the repayments.
As such, the FCA wanted to take a close look at the industry to analyse the problems and see where changes could be made. It's since set out a package of reforms which is intended to ensure mortgages will still be widely available to those customers who can afford it, while preventing a return to the poor practices of old and ensuring those who can't afford it won't be left struggling.
Essentially, the new rules stipulate that lending criteria will be tightened. Lenders will be required to fully assess whether or not the customer can afford the loan, including the application of additional "stress tests" to account for any future increase in mortgage rates, thereby ensuring a rate rise won't leave borrowers in difficult financial waters.
The lender will need to verify the customer's income and expenditure, and many applications will include lengthy questionnaires that ask for a detailed overview of spending. This could include everything from one-off costs to everyday spending and your level of debt, and even the likes of childcare, home maintenance, student loan repayments and how much you spend on food and utility bills each month will be taken into account.
Potentially, yes. At the least concerning end of the scale is the fact that the mortgage application process will take longer given the increased number of checks involved, but slightly more worrying could be your affordability profile.
From 26 April, when all lenders need to be compliant with the new rules (and some are getting in ahead of schedule by applying their additional checks in the next week or two), you'll need to not only prove that you can afford the mortgage repayments now, but that you could continue to do so in the face of rising interest rates. Some lenders are basing their criteria on the ability to make repayments when rates hit 7%, a figure which could potentially be reached in the next five years, and one which could result in a huge increase to monthly outgoings. If you're already on a tight budget it could be even more difficult to afford the mortgage should rates rise to this level, and if you can't prove your ability to repay it at that point you could well be rejected.
Figures from the Intermediary Mortgage Lenders Association show that 57% of lenders believe more people will be turned down for a mortgage in light of the new rules, while anecdotal evidence from providers reveals that many are expecting to offer lower loan amounts than before. Even things like making regular payments into a pension, life insurance policy or paying off student loans could have an effect – anything that potentially impacts monthly income will be taken into account, and could result in maximum loan sizes being reduced.
It doesn't only apply to first-time buyers either. Even home movers or those looking to remortgage will need to go through the same application process, so even if you've lived in your home for years, you're not guaranteed to be safe from the changes. Those with an existing loan who fail to meet the criteria might find that they're able to remortgage, but the new loan won't be able to exceed the current amount – but the decision on whether or not this will be allowed will be with the lender itself.
Despite it potentially becoming tougher to be approved, all is not lost – it doesn't mean it'll be impossible to get a mortgage. A lot of lenders have already become increasingly strict in who they lend to since the financial crisis so they may not need to adjust their criteria too heavily anyway, and some have used the 7% stress test for several years. Some people might find their maximum loan size reduced rather than being refused altogether, but ideally, for most people, the amounts involved won't negatively impact your profile so there may not be too much to worry about.
The key thing to do is make sure affordability won't be an issue in the future. It's no longer possible to simply get a loan based on four times your salary with minimal financial checks – you'll need to take a cold, hard look at your expenditure and, if things are tight, you'll want to make the necessary adjustments before you even think about starting that mortgage application.
Lenders will look at everything from essential spending to non-essential outlay, some even going through bank statements with a fine-tooth comb, and they'll expect evidence to prove your affordability expectations. Make sure to keep a tab of everything you spend and take note of areas that can be improved – if it means swapping meals out for home-cooked alternatives, do it. It's a small price to pay for securing that mortgage.
Other options include applying for a mortgage over a longer term – such as 35 years rather than 25 – in order to reduce monthly repayments improve affordability calculations, and then if you wish you can overpay it to bring the term back down again.
Of course, you'll still want to save up as much as possible for that all-important deposit, as the lower the mortgage amount the lower your monthly payments will be, and they won't rise to such an extent should rates increase either. It's all about being prepared and, if you're responsible and realistic, hopefully the MMR won't affect you too much.
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