Where we have come from
Thirty years ago, owning property was a privilege, not a right. You needed to have an exemplary credit history and a 10% deposit or more. If you had those ingredients, a lender would consider you for a mortgage of up to three times your annual gross salary or three times your net profits if you were self-employed.
In addition, the lender would make a careful assessment of your affordability, taking into consideration other commitments you may have, such as childcare, school fees, maintenance payments and other credit commitments. They would write to your employer for a reference and double-check to ensure that whatever you had put down on the application form was correct, including salary and length of contract.
From the lender’s perspective, their biggest fear was repossession – a nasty, traumatic and costly exercise for lender and borrower alike. As a consequence, if one bit of criteria failed assessment – for example, if the lender discovered adverse credit on your file – the answer was a straightforward decline and a polite “come back in three years’ time and we may be able to reassess”.
Where we ended up
Over time, things loosened up. Fast forward 20 years to 2003, and witness a mortgage market that had changed beyond all recognition. The UK’s fixation with property had turned into obsession and lenders were now prepared to take much bigger risks because of the prolonged boom in house prices. The fear of repossession had long disappeared; for with massive demand from developers for repossessed properties, the repossession market in itself was a profitable business.
More and more organisations became keen to lend in this seemingly low-risk environment – keenness turned into naked aggression. Literally everyone was a candidate for a mortgage. Ten times salary? No problem. Can’t verify your income? Not an issue, No deposit? Who cares? Bad credit? How much do you want? With a property market continuing to boom, everyone wanted a piece of the action. By 2007 the fever had reached boiling point and there was an almighty crash, spearheaded in the UK with the demise of Northern Rock in September.
Where we are heading
Shortly after the crisis, having had their fingers burnt, lenders became exceedingly defensive about lending. First-time buyers were looking at deposits of 25% to secure a mortgage and adverse credit lending had all but vanished. Today, there are signs that things are loosening up again – it is now possible for first-time buyers to purchase with a 10% deposit. But the FSA has stepped in with new rules due to be implemented in 2014.
In a nutshell, lenders will take a close look at your expenditure and commitments. There will be more stringent affordability checks and lenders will write to your employer to verify everything. Although interest-only mortgages will be considered, lenders will require evidence of a credible repayment vehicle. With the government’s regulator being keen on “common sense lending”, one of the good things to come out of this is that the new rules will give lenders flexibility to decide what type of evidence of income to accept from self-employed customers.
This new approach of common sense lending will alienate a few borrowers, but many commentators believe it will be good for the property market in the long term. Whatever the case may be, it looks like we have come full circle; forward to the past. Perhaps owning property is a privilege after all.