Many borrowers could find themselves locked out of the best deals and see their mortgage payments soaring when their current deals come to an end as result of the City watchdog’s overhaul of the sector writes Philip Scott.
The new rules, which come into play from 26 April are a result of the Financial Conduct Authority’s Mortgage Market Review (MMR) which is putting strict affordability checks in place in a bid to stop people from taking on loans they ultimately cannot afford.
The regulator’s shake-up means that from tomorrow anyone applying for a mortgage will be put through a far more arduous and detailed financial health-check than they may have previously endured, before they are granted a loan.
While typically a few months’ pay-slips would have been sufficient evidence of earnings and affordability in terms of getting a mortgage, under the new regime borrower’s spending will be put firmly under the microscope and non-essential spending including gym-memberships and cash spent on a typical night out will even be brought into play.
Clare Francis, mortgage expert at comparison site MoneySuperMarket says: “Those looking to remortgage, or existing borrowers who are moving home and looking for a new deal, may find the application process takes longer with lenders and advisers doing more in depth questioning and some may feel that it is tougher to get a mortgage now than it has been in the past. Lenders must be sure that the applicant can afford the loan, not only now, but also in the future.”
Many lenders have already been operating under the new rules for the past few months but for borrowers on mortgage deals due to come to an end soon, they may be in for a shock when they begin shopping for a new loan.
Lenders will not only have to ascertain that a borrower can afford the loan at the current interest rate but also if the rate were to increase over a five-year period.
For those whose circumstances and therefore finances have changed, such as the arrival of a child, their lower disposable income may well mean that less of the more attractive deals are offered to them and they may be have to go onto their current lenders standard variable rate (SVR), which in some cases can be as high as circa 6%.
Sue Anderson of trade body, the Council of Mortgage Lenders says: “For those on a particular deal coming to an end, it may be the case that they revert to an SVR or tracker deal. It may not necessarily be higher but the chances are it will be. Some people may find it more difficult to get a good deal under the new requirements. If your circumstances have changed your eligibility will be different.”
Ray Boulger at mortgage broker John Charcol adds: “Many people will find it more difficult to get a better deal and will move to the SVR as a result. Anyone with children under five years of age, are going to be restricted to varying degrees.”
A non-sensical area in all of this is that some lenders are treating essential expenditure and non-essential expenditure in the same manner says Boulger. He adds: “But people will cut back on the latter when it comes to paying their mortgage. However some lenders are assuming they will continue with their current rate of non-essential expenditure indefinitely.”