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From Saturday 26th April, the full implementation of new rules designed by the Financial Conduct Authority come into effect across the UK mortgage lending sector. These rules, the Mortgage Market Review, aim to protect consumers from the reckless lending that led to the crash in 2008 by changing the criteria on which a lending decision is made.
Traditionally, a mortgage lender would determine the amount that an applicant could borrow by applying a multiplier to their income. Under these new rules, the emphasis has shifted to the ability to afford the repayments.
The mortgage lender will interview all applicants to carry out an Affordability Check where their household income and expenditure will be reviewed in microscopic detail and where they are required to disclose any significant upcoming changes to their income.
One of the area of expense expected to come under particular scrutiny is child care costs. The government Tax-Free Child Care scheme does not come into effect until autumn 2015 and, until then, in many cases the parents carry the full cost.
Applicants are therefore faced with a vicious circle where this cost of allowing both parents to work to increase their household income will become an impediment to securing a mortgage.
Not only does the Affordability Check have to show that the repayments can be afforded today but also for the next five years. For example, lenders will apply a stress test to determine if the household budget can sustain the repayments if the level of interest rates were to increase by 3%.
These rules apply both to first-time buyers and those looking to remortgage and will have an impact both on the amount that can be borrowed and the length of time the application process will take.
To present the best picture to mortgage lenders, applicants are advised to have their household budget worked out in detail and to have reviewed their regular expenditure before starting the process. Paying off any debts, where possible, and the trimming the extras (such as unused gym memberships, a subscription to a streaming service or a wine club fee) will boost the profile.
It needs to be borne in mind that the mortgage lender will require at least three months of supporting documentation to show that they are financially healthy. As a result, any lifestyle changes need to be made well in advance of starting the application process.
Whilst those with a thrifty lifestyle and no dependants will potentially be able to secure a larger mortgage than they would have done previously, for the vast majority securing a mortgage just got tougher!
If you would like more detailed guidance on the impact of the Mortgage Market Review or have a specific question, please contact welcome@cooperfaure.co.uk to arrange a consultation.
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