Taking out a mortgage is set to be more difficult this year as a wave of changes take effect, experts have warned. A shake-up in the rules around affordability, the withdrawal of cheap funding for banks and building societies, plus fears of a new housing bubble could all lead to lenders toughening their criteria and saving home loans for low-risk borrowers.
Affordability checksPerhaps the biggest change for consumers will come in April when the Mortgage Market Review comes into force. These new rules, created by the Financial Conduct Authority, have been designed to protect consumers and prevent excessive or risky lending by mortgage providers. However, lenders and brokers say the change will extend the process of taking out a mortgage and reduce the amount borrowers can raise.
The number of affordability checks carried out when you apply for a loan will grow as lenders will be forced to delve deeper into borrowers’ financial situations before deciding whether to offer a mortgage. All monthly payments and household expenditure will be considered during the application process and will need validation. The changes will outlaw self-certified mortgage products from the UK market and signify a move away from the traditional method of using income multiples to judge how much a customer may borrow.
“This means when speaking to a lender or mortgage broker about their mortgage needs borrowers should be prepared to answer questions about their monthly income and outgoings,” says Paul Broadhead, head of mortgage policy at the Building Societies Association. “This may include the costs of travelling to work, childcare, other household bills including energy costs, and details of any loans and credit cards that will continue after the mortgage is taken out. The new rules may mean some borrowers find they can borrow less than they might have expected in the past.”
Some banks and building societies have already started to include these additional checks for some deals such as Help to Buy, and figures in the industry say they have already seen an increase in the length of time a mortgage takes to complete.
“Borrowers who have not been through the mortgage application process since the peak [in 2007] will be amazed at the changes,” says David Hollingworth of mortgage broker London & Country. “A lot more paperwork has to be provided and there is a lot more scrutiny of documents such as bank statements and anything might need to be substantiated. This is supposed to go towards making a better, considered lending decision.”
Stress testing Around 50% of all borrowers will also be obliged to see a qualified mortgage adviser, which is likely to lead to a longer sales procedure and could involve additional meetings.
Hollingworth says: “We are already starting to see customers using branches going through two or more interviews with branch staff, which is time-consuming for both the branch and, more importantly, the customer. It can be more of a drawn-out process with papers flying backwards and forwards.”
Another change dictated by the new affordability guidelines will be “stress testing” of mortgage applicants to see how they would cope with a rise in interest rates. So as well as working out if you can afford the mortgage at the current interest rate, the lender will check that you can afford monthly repayments at a higher interest rate. It’s not clear exactly how much higher that will be, but if the lender decides you can’t meet repayments at that level, it will reject your application.
More expensive mortgages?An increase in the Bank of England base rate is expected in the next few years. In addition, the withdrawal of cheap funding for home loans through the government’s Funding for Lending Scheme is likely to cause rates to rise in the coming months, as banks must instead source more expensive cash, passing this cost on to consumers. The cost of implementing the new rules may also hit customers, with lenders raising mortgage rates or fees to help pay for higher staff costs and the expense of changing systems.
“You could see more lenders charging booking fees up front and looking for more commitment from borrowers,” says Hollingworth. “So if a borrower then changes their mind they have already paid something up front which won’t be refunded.”
Although the end result may be better lending, it is possible that banks and building societies will be ultra-cautious in the early days of the new rules. “One possible effect of the regulations is that product innovation is stifled until lenders have a full appreciation of how the regulators will supervise the new regime,” says Broadhead. The Council of Mortgage Lenders has warned of “wobbles” in lending during the months surrounding the implementation of the rules, but says it believes any impact should be modest.
Jonathan Harris, director of mortgage broker Anderson Harris, adds: “While many of the recommendations have already been adopted by lenders, its formal introduction could well slow the market down for a couple of months as all the detail is implemented.”
The Bank of England has already increased its focus on the mortgage market following the launch of the government’s controversial Help to Buy scheme. Governor Mark Carney has spoken about the possibility of caps on loan-to-value ratios in the mortgage market to help prevent a return to risky and unsustainable lending.
If house prices continue to rise at the rate they did in 2013 it could make it even harder to get a home loan this year, and Hollingworth says borrowers should act now to seal a low mortgage rate: “There is no point hanging on. Rates out there are still extremely low and there are still savings to be made and you can protect yourself against future rate rises too. Everything points to making a move now.”
Do your homework firstSomething as small as an unpaid bill could be enough to see a mortgage application declined. Here are the some key steps to take before you apply:
■ Check your credit report. Lenders will look at your credit history to judge the strength of your financial situation.Occasionally the reports contain mistakes. Use Experian, Equifax, or Call Credit to make sure everything is in order.
■ Try to pay off existing debts before you apply. Lenders want to see that you can pay back loans on time and in full each month.
■ Avoid drastic changes in financial circumstances before you apply. Lenders want to see a borrower who has a settled financial history so try to avoid taking more credit in the months immediately before you ask for a mortgage.
■ Check you are on the electoral roll. Banks and building societies will use this to verify your identity so make sure you are listed before starting the mortgage process and avoid problems later on. This can be done quickly and easily by contacting your local council.
■ Avoid job changes. Before accepting a loan most mortgage providers like a borrower to have held a job for a number of months to prove that you have a steady income stream.