14th April 2014
Mortgage borrowers may find it more difficult obtaining the loan they want following the introduction of new rules on April 26 writes Jill Insley.
Following an extensive review of the mortgage market, the financial watchdog the Financial Conduct Authority is implementing a range of measures to protect homeowners against risky borrowing and from taking on more mortgage debt than they can afford.
One part of the measures, which control the lending of interest only mortgages, has already seen that type of loan all but disappear from the market.
Now lenders are gearing up for the next change. Firms that conduct applications over the phone or face to face will be required to provide advice on the most suitable mortgage product for the applicant, based on a more detailed interview about the applicant’s finances. They will also have to carry out ‘stress testing’ to ensure borrowers can continue to afford repayments when interest rates rise.
However, while the closer scrutiny of borrowers’ finances is designed to reduce the number of people who find themselves struggling with debt, the tighter controls will result in some being turned down for mortgages they would have qualified for under the old regime.
Borrowers should be prepared to answer more detailed questions about their spending, says James Cotton, of mortgage broker London and Country. “Lenders will be taking more things into consideration,” he says. “You will still have to provide information about your salary, credit cards and loans, utility bills and council tax. But now there will be closer inspection of your discretionary lifestyle spending, such as gym membership, food, eating out, clothes and holidays.”
Claims about income and spending must be backed up with hard evidence – lenders will ask to see a range of documents, including bank statements and bills, to make sure they have a full understanding of their client’s finances.
“People who are paperless – doing all their bill payments online – will need to check that the lender will accept a print off,” says Cotton.
Many lenders have already adapted to this way of working out what a borrower can afford. Those that have stuck to the traditional method of income multiples – multiplying the borrower’s income by a set number, typically 3 – to calculate the possible mortgage size, or have asked a more limited range of questions about spending, have been winding up applications processed under the old rules in the last few weeks.
Steve Blore, a spokesman for Nationwide Building Society, says: “We have been making a series of relatively minor changes to our mortgage application process over several weeks in anticipation of MMR.
“All branch customers will receive advice from one of our Mortgage Consultants. In order for the Mortgage Consultant to recommend an appropriate product for the customer, they will be asked a few additional questions, such as if they have regular travel costs or how much their childcare costs, to ensure that we can identify their individual needs and circumstances. This discussion may take a bit longer but not dramatically so.”
The biggest delays will be caused by borrowers failing to have the required documents to hand when the lender asks for them.
More applicants are likely to be rejected at the stress test stage. In addition to considering affordability at the time of application, the FCA requires lenders to consider the impact of expected interest rate increases during the first five years on borrowers’ ability to pay. It has suggested adding the five year forward sterling rate – currently 3.5% – to the lender’s standard variable rate as a measure.
Peter Dockar, head of mortgages for HSBC, says: “This is to ensure that a customer should be able to afford to see interest rates go up by 3% at least.”
As the typical standard variable rate is more than 4%, this means that lenders could be using a stress test rate of 7% or more. Someone applying for a two year fixed rate mortgage with a 90% loan to value from Clydesdale Bank would pay interest of 3.89% just now. But the bank’s standard variable rate is 4.95%, raising the prospect that applicants could have to pass a stress test rate of more than 8% if the Clydesdale sticks to the FCA’s recommendation.
However, Mark Harris of mortgage broker SPF Private Clients says: “Lenders are free to use what figure they feel appropriate. They just have to be able to justify it to the FCA.”
He says that many lenders already apply stress testing to applications, but keep the process quiet. The Woolwich, which is more open about its processes, has recently raised its general stress test rate from 5.69% to 6.74%, and it applies a higher rate of 7.49% to higher risk Help to Buy and Family Springboard borrowers.
“Each lender will have a slightly different interpretation of the rules,” he says. “They have trained their mortgage advisers to deal with the new process, but it will take mortgage brokers a little while to learn what each lender’s new stance is, to work out which is likely to be the best for a particular client.”
What documents to have ready
Council tax bill
Credit and store card, HPI and personal loan balances
Other regular outgoings such as gym membership, childcare, child maintenance, school fees, mobile phone bills
Be prepared to answer detailed questions on your discretionary spending