The Mortgage Market Review (MMR) was the single biggest change in the residential mortgage market since the financial crisis, and its effects are still felt today by anyone applying for a mortgage – not to mention the providers themselves.
Under the new rules, which came into force back in April 2014, lenders have to apply strict criteria when considering mortgage applications. To help you understand what this means for you as a (future) mortgage borrower, here’s an overview of the MMR rules and how they’ve affected the market.
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 then set out a package of reforms which it 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 MMR has caused lending criteria to be tightened. Lenders are now required to fully assess whether or not a 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.
For any application, 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.
As it’s now been a few years since the review, you may not notice any impact. However, for anyone who’s had a mortgage for years and who is now looking to remortgage, you may find that the mortgage application process now takes longer, given the increased number of checks involved. Additionally, your affordability profile could look quite differently.
Since the review, you need to not only prove you can afford the mortgage repayments at the moment, but also that you will continue to do so in the face of rising interest rates. Given ongoing economic uncertainties and the fact that the Bank of England could well choose to increase the bank base rate further in 2019, increases in mortgage rates are bound to happen. If you're already on a tight budget, it could be even more difficult to afford your mortgage should rates rise, and if you can't prove your ability to repay if/when they do, you could well be rejected.
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. As these changes apply across the board, those with an existing loan who fail to meet the criteria might find that while they're able to remortgage, the new loan won't be as much of an improvement as it might have been before – although this will still depend on the lender itself.
Regardless of what happens to mortgage rates, you’ll still want to compare mortgages so you can find the best product for your needs.
Despite it potentially being tougher to get approved, all is not lost – it doesn't mean it'll be impossible to get a mortgage. 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.
Basically, if your finances are in good health and you're responsible with your spending, it shouldn't be unnecessarily tough to be approved – but if you're concerned it's time to make some changes.
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 and improve affordability calculations, and then if you wish you can overpay 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.
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.