What was the problem?
Before the financial crisis in 2008, the housing market was booming and lenders were extremely keen to lend. In some cases, buyers were able to take out a 100% mortgage, borrowing up to the full price of a house, and repay only the interest. Lenders were comfortable with this, believing that house prices would continue to rise, thereby reducing their exposure to the risk of high loan to value lending. We all know what happened next!
When property prices fell, many found themselves in negative equity. Some of these people lost their homes as a result of being unable to manage their debts and everyone started looking for someone to blame. The city regulator, the FSA got it in the neck and were branded reckless and irresponsible. The new regulator, the FCA has vowed: NEVER AGAIN, and brought in the Mortgage Market Review in April 2014 to prevent a repeat of the same.
So what does this mean in practice? The new mortgage rules are intended to emphasise “common sense lending”. A stricter lending interview could mean that a lenders will ask more delving questions about an applicant’s lifestyle, income and outgoings; and the whole process could take longer. That could extend the amount of time it takes to move home.
Kevin Walters, mortgage adviser at Sterling & Law says; “Whilst no lender would suggest that you shop at Aldi instead of Waitrose, they will look at income and expenditure much more closely. Apparently, one lender asked whether the applicant would continue to have milk delivered as opposed to the cheaper option of buying milk as part of the weekly grocery shop!”
Some people could find that where they may have been able to get a mortgage previously, the lender is only prepared to offer a smaller amount now or nothing at all. This will not only affect first-time buyers, but also those looking to re-mortgage. One reason for this is that a lender has to “stress test” a customer’s ability to repay if interest rates were to rise.
The stress test: Mortgage rates have been low for some time and are almost certain to rise in the future. A lender, who might be offering a mortgage with an interest rate of less than 4% today would have to decide whether an applicant could afford the mortgage if the rate rose to say, 7%. In order to decide, the lender will not only take account of income, but of outgoings too.
As has been the case for a number of years, the self-employed, especially those who present their financial affairs to HMRC with a view to paying as little tax as possible may find it difficult to raise the amount they believe they can truly afford. Most lenders look at the average net profit from 3-year’s accounts. They may then further verify the accounts by asking for SA302’s which are supplied by HMRC and used by lenders to verify the amount of tax you have paid.
Older applicants will also be affected, with lenders now a lot more interested in how a mortgage would be paid if it were to extend to beyond state retirement age. Some lenders may ask to see pension statements to verify a retirement age of say, 70 or beyond.
Uncertainty ahead? The consequence of the new rules could result in a cooling of the housing market – much needed in the eyes of many. Further cooling could come when you combine stricter lending with the potential for interest rate rises.
Either way, it is probably now more important than ever to use a mortgage broker who has a good understanding of the mortgage market prior to applying. We have a good understanding of what lenders are looking for here at Sterling & Law, and may be able to help applicants “present themselves” more favourably than they could without our help. We may well suggest something as trivial as cancelling that unused gym membership!