Buying a home can be difficult enough for first-time buyers and those looking to upsize, while it’s financially beneficial to remortgage to a cheaper deal when your current one comes to an end.
This makes for a lot of concerned borrowers that these new stricter rules will make it harder to get a mortgage. We take a look at what’s changing and what impact the MMR regulations are likely to have.
Why are these new rules being brought in?
In the past, people have been offered home loans which they struggled to repay, meaning they fell behind with their payment schedule, or even had their home repossessed. The aim of the new rules is to ensure that lenders act responsibly, and don’t offer people mortgages which ultimately they can’t pay.
What is changing?
The vast majority of people applying for a mortgage will now have to receive mortgage advice, which means the mortgage application process is likely to take longer than it did. In fact some experts claim that interviews could take as long as three hours, as opposed to around an hour now.
On the plus side, however, it does mean consumers will be better informed about the mortgage choices available to them.
You can either get advice from a mortgage broker, or a financial advisor, or directly from lenders. However, remember if you go direct to a lender, they will only recommend their own products.
In some circumstances you can still apply for a mortgage without taking advice, but you must demonstrate that you understand the details of the mortgage you want and be able to arrange it yourself.
If you do want to go it alone, you’ll have to be armed with the following:
- The lender’s name
- The interest rate
- Interest rate type (fixed or variable)
- The length of the mortgage term
- The value of the property
- The amount you want to borrow
- Whether you want an interest-only or repayment mortgage
A spokesperson for the FCA explains: “If you choose to get a mortgage without advice, your lender or advisor must tell you in writing or in conversation about the legal protection you will lose. This may include the right to complain about how suitable the mortgage is for you.”
All consumers, regardless of whether or not they receive mortgage advice, will also have to provide more details of their income and expenditure, so expect lenders to go through your bank statements with a fine-toothed comb. MoneySuperMarket's editor-in-chief, Clare Francis, explained: "Lenders will have to look more closely - almost forensically - at your monthly outgoings.
"Things such as childcare costs, pension contributions, the amount you spend on the weekly shop and even gym memberships will be taken into account when assessing whether or not you can afford the mortgage you've applied for. But this is a practice that, albeit in different degrees, is already happening - especially for borrowers looking to borrow large amounts relative to their income."
As a general steer, though, this is the sort of information lenders will ask you for post-MMR:
- Your bank statements
- Details of any existing debts
- Information on ALL your outgoings, including things such as childcare costs, holiday spending, pension contributions and even food costs and nights out
- Proof of your income, so payment slips from your employer or at least three years’ accounts if you are self-employed
Lenders will also need to establish that a borrower can afford their mortgage not only at the current interest rate, but also if the rate were to increase.
David Hollingworth, of London and Country mortgage brokers said; “Lenders will apply a ‘stress test’ rate based on market expectation of rate movement over the next five years. Lenders have generally applied some kind of stress test before but the MMR requirements could be tougher with applied rates expected to be around 6 to 7%.”
For example, Woolwich has said it will test affordability by applying a 6.74% rate. So, even though the deal you are on now might be at 3%, you must be able to show you could afford payments if your interest rate rises to more than double this.
Who will be affected?
Anyone looking to take out a mortgage will be affected by the new rules, and it is estimated that this will mean around a million homebuyers in 2014.
Do the rules cover all mortgages?
The rules only cover mortgages where you use your own home as security for the loan, but do not include buy-to-let mortgages or second-charge mortgages.
Andy Knee, chief executive of property firm LMS, said: "New buyers are likely to feel the effects the most, with stringent new checks and rigorous measures meaning even the most careful savers could face delays in stepping on to the property ladder."
Weren’t mortgage rules tighter anyway?
Yes. Following the credit crunch, lenders have been much stricter about who they will offer mortgages to. And the industry as a whole has been preparing for the MMR for the past 18 months or so anyway, so lots of lenders are already using the new approach.
Paul Broadhead, head of mortgage policy at the Building Societies Association said: “Overall, while some people may not be able to borrow as much as they expect it does not mean that those on lower incomes or those with smaller deposits will be frozen out of the property market. What it does mean is that lenders will continue to take a common sense approach to mortgage lending. It is important that the regulator does the same.”
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