The new regulations required mortgage lenders to be much more thorough when reviewing and assessing mortgage applications from potential customers. Lenders now require much more documentary evidence to support a mortgage application, rather than just taking the customer at their word. In addition there are some key points that mortgage applications in the last 5 months will have been subjected to;
- Applicants now have to provide evidence of how they earn rather than just enter a number in the box. This is not usually a problem for most applicants on a straight salary paying tax on a PAYE basis as it’s as simple as providing some recent payslips. Those that suffer are those who are self-employed or applicants whose income is derived from salary plus commission, bonuses, overtime, allowances or other ‘extras’. These can be difficult to consistently evidence which often means the lenders won’t accept that part of the income.
- Affordability analysis is now key to a lender’s decision. Whereas previously, lenders would look at income levels and often apply a multiple to reach a loan amount – that figure is now driven more by assessing an applicant’s expenditure as well as income to work out a disposable income. The disposable income figure then drives what the applicant can afford in repayments, which in turn drives the total amount they can borrow.
- Affordability now needs to ‘stress-tested’ against possible future interest rate rises and/or changes in the applicants personal circumstances. Typically lenders will look to see whether the applicant can still afford the mortgage if the interest rates were to rise to 5-6%.
The FCA introduced the new measures to stop borrowers taking out unrealistic commitments or over-stretching themselves by presenting their application in a favourable light.
However, critics feared that the tighter requirements would reduce the ability of the average consumer to secure a mortgage and the latest house price figures suggest they could be a factor. The latest house price figures published by Halifax (no longer available) show that house price growth slowed in the 3 months to August – coinciding with the introduction of the new rules.
There are other factors at play – the general belief that an interest rate rise will occur in the next 6 months being the main one – but the new rules could also be playing their part as applicants who would have been accepted previously are finding it difficult to purchase or re-mortgage.
Whilst the pressure is now on lenders to more thoroughly research the true financial circumstances of potential customers, it’s not all bad news for would be borrowers – in fact there are some whose ability to borrow has been increased by the new approach.
Traditionally the mortgage lenders would have applied to a multiple of income to ascertain maximum total borrowing (for example – 3 times salary on an income of £50,000 a year would have meant a maximum mortgage of £150,000). However with the focus having switched to disposable income (or Affordability) those applicants with good salaries but relatively low monthly commitments can find themselves being able to borrow considerably more – sometimes up to 5 or 6 times their income.
The types of customers who are benefitting are more typically single adults with few commitments or working couples with no children and little existing borrowing.
For those not fortunate to find themselves in that situation – and let’s face it that’s most of us – then the risk of being trapped by your mortgage is increasing. Existing mortgage customers may find it more difficult to re-mortgage if they don’t qualify under the new rules. Whilst interest rates remain low that may not be too much of an issue, but if they start to rise then they could be caught between increasing mortgage costs and not being able to access the lower rate products.
Interestingly, the unsecured loan market (whilst subject to similarly tightened regulation) has seen a large increase in the number of new lenders and products entering the market. This increase has also been coupled with a reduction in interest rate charges across some products over the last 12 months (notably Guarantor Loans and Logbook Loans) with regulatory caps set to be introduced for Payday Loans in January.
So whilst access to mortgages may, for some, become more restricted the choice of unsecured options has increased and the price is falling – which may offer a solution for those who were looking to re-mortgage to increase their borrowing rather than move home.