On Saturday 26th April the UK saw the biggest change to its property market for more than a decade, when the Mortgage Market Review was put into place by the Financial Conduct Authority (FCA), changing the way applications for mortgages are carried out and approved. The changes will give banks the power to look further into an applicant's finances before deciding to lend money – this will include asking questions about the applicant's lifestyle and future expectations on income and expenditure.
Before the financial crisis, many people took out mortgage loans, self-certifying their financial information and often exaggerating their incomes and outgoings; when the recession hit, they were unable to keep up with their mortgage payments. To prevent this happening again the FCA has made mortgage assessments more thorough.
Previously mortgage loans were calculated based on a multiple of the homeowner’s income but the FCA have designed the new system to “hardwire common sense” into the mortgage application process by looking into finances in a more realistic way. The new Mortgage Market Review has been reported by the FCA to last up to 3 hours and to include questions on lifestyle and future finances.
Questions asking about gambling and pay day loans seem like relevant areas to question when predicting financial stability, but other questions which have been introduced ask about money spent on childcare, socialising, memberships, leisure, travel, and even cleaning products and haircuts! All these areas are predicted to give lenders a better idea of how their potential new clients currently spend their income and whether their lifestyle will have implications on how easily, and at what rate, they will be able to make mortgage payments.
Another section of the Mortgage Market Review will ask applicants if they are predicting any income or spending changes in the near future such as a new baby or job, which will also be taken into account when reviewing their financial situations. A stress test will also be carried out to check whether the applicant will be able to cope in a fluctuating market if interest rates were to increase over a five-year period, to ensure people are not left in a situation where, as in the recent recession, mortgage repayments became problematic.
Peter Hill, Chief Executive of Leeds Building Society has said that whilst researching the implications of the new review, it was found that the new MMR is only expected to affect 2.5% of borrowers, meaning that the majority of new buyers or home owners will not be rejected due to the new procedures; people with an income of £300,000 or more or assets worth £3m plus will be able to escape the MMR completely.
Ray Boulger, Senior Technical Manager from mortgage advisers John Charcol, has made the point that when we have a mortgage or other essential payments to make, the money we spend on socialising, leisure, travel etc. often gets cut back, meaning that the MMR may not give an accurate indication of how the applicants will adapt once they start paying their mortgage. Another criticism of the MMR is that if it makes it more difficult to buy a property, then the already expensive rental market will increase its prices, making it even harder for tenants to save for their first home. Finally the new system’s lengthy process is likely to create delays creating a back log of applicants who will now have to wait longer to be approved for a mortgage.
Regardless of the criticism, the MMR is now in place, so to help you pass the new review we recommend ensuring your finances are up to date by checking your credit rating, adjusting any unnecessary spending and researching well in advance which properties you can afford on your budget. If you have any more questions about the new Mortgage Market Review please feel free to get in touch with us or come into one of our Cardiff offices to have a chat.