Lower earners and self employed may fail to get mortgages as big lenders’ computerised decisions apply tougher lending rules

23rd April 2014

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Ipswich Building Society has warned that new mortgage regulations risk creating a new group of mortgage misfits among the self employed and those earning less than £25,000 a year.

From the 26th of April this year new regulations designed to curb the lending excesses of pre 2008 could result instead in credit worthy people finding it harder to get a mortgage or re-mortgage their existing home says the lender.

The Mortgage Market Review is an initiative by the financial watchdog the Financial Conduct Authority that has imposed new affordability criteria on those who apply for mortgages.

Under the new regulations it may become a lot harder for what Ipswich are calling ‘mortgage misfits’ to obtain a mortgage.  These are borrowers who may be let down by lenders’ system that relies on automated assessments based on calculations of the ‘average’ borrower.

The building society says ‘misfit’ customers include those earning less than £25,000 per year; small business owners; the self-employed; and those who have different income sources such as pensions, equity in a business or property, rental income and investments.

Ipswich Building Society says it will avoid this by focusing on a manual underwriting process to ensure careful consideration of individual circumstances.

The Society will retain its existing methods of verifying income and will use an applicant’s own evidence of spending rather than relying on a computer model to determine what ‘typical’ spending looks like.

Paul Winter, Chief Executive of Ipswich Building Society, says: “It is entirely appropriate that the FCA wishes to introduce regulation to ensure the lending excesses of pre 2008 are not repeated and that irresponsible lending is firmly tackled. However I am concerned that people on average incomes may now find it harder to obtain a mortgage and I believe this may prove to be an unintended consequence of the methods used to implement affordability requirements.

“Ipswich Building Society has always manually underwritten and carefully reviewed the financial situation of our mortgage applicants. This is confirmed by our lower than industry average arrears levels. Previously acceptable borrowers may now struggle to pass the new affordability test if relying completely on computer data to prove expenditure. Whilst we cannot change the new affordability model, we will offer borrowers the option to provide their own expenditure evidence rather than relying on a computer model. We hope this will help more people to obtain a home of their own.”

The lender argues that current data shows that a family of two adults and two children wishing to purchase a property for £125,000, with a household income of £30,000 and with a 10% deposit, would not meet the requirements of affordability using expenditure data from a computer model. Analysis comparing the computer model expenditure data to that of ‘real’ applicants’ evidence of expenditure has shown that using the latter would pass the affordability test.

In light of MMR, Ipswich says anyone looking to borrow will need to consider lifestyle changes well ahead of taking a mortgage, not only saving for a deposit but checking their levels of credit, reducing any debts and reducing general spending habits.  Top tips include: checking your credit files on a regular basis to ensure there’s nothing unpaid logged or that no fraudulent activity is present; ensuring old bank cards are closed; all accounts in your name are registered to the same address and that you put a landline on applications to demonstrate stability; and ensuring you are registered on the electoral role.

Ipswich Building Society has also launched an affordability calculator at http://www.ibs.co.uk/intermediaries/affordability-calculator and sent out this handy infographic to allow you to identify whether you are a mortgage misfit.

Mortgage-Misfits-consumer

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