Are you about to become a mortgage misfit?
On April 26th, the process for obtaining a mortgage in the UK changed. The Mortgage Market Review (MMR) – a comprehensive in-depth report on the state of the UK mortgage market, carried out by what is now known as the Financial Conduct Authority (the FCA) – was completed in October 2012.
The recommendations resulting from the report have now been rolled out. If you’re in the UK and thinking about obtaining a new mortgage (or re-mortgaging an existing one), you will be affected by the changes:
Why was the MMR put in-place?
The MMR was an in-depth, comprehensive review of the UK’s mortgage set-up in order to ensure the sustainability of the mortgage market. Pre-2008, the market had seen an increase in loan to value levels in excess of the total property value, and to those at a higher risk of not meeting their repayments. Recognising that the existing frameworks had not been effective in tackling irresponsible lending, the FCA commenced their review.
What changes have been made?
The new regulations are set to affect both intermediaries and lenders, with some of the most notable changes being:
- Lenders and mortgage brokers will not be permitted to use a non-advised sales process. The non-advised process meant that the borrower would be presented with a series of mortgage products, and would be able to select the final product themselves. Under the new regulations, all borrowers will receive a fully advised sales process. This means that mortgage brokers and lenders’ mortgage consultants will have to establish the best product to meet the needs of the borrower. If a borrower does not want to receive advice, then they should look to purchase their mortgage online or by post.
- Responsibility for the affordability of the mortgage is now entirely the responsibility of the mortgage lender. They are also responsible for verifying income.
- Any individual conducting mortgage sales will be required to hold a relevant mortgage qualification.
- Lenders may continue to offer interest-only mortgages. However, this can only be done where an agreed repayment method in place, such as savings or endowments. Your mortgage lender will be able to tell you if they offer interest only mortgages and the types of repayment methods that will qualify.
What does this mean for those wanting to get a mortgage?
No bank or building society wishes to lend money to those who cannot afford it, however the new affordability requirements could result in certain groups of people finding it tougher to obtain a mortgage. These include:
Those with incomes below £25k – Those with a household income below £25,000 may find the new process hard going. Properties that previously would have been within reach before could now be too expensive. It will still be possible to obtain a mortgage whilst earning less than this, but the total amount available to borrow under a mortgage could be reduced. Some lenders have affordability calculators on their websites so you can gain an idea of your affordability in advance. Furthermore, it is worth finding a lender who will use your own data to verify your expenditure rather than those who use a computed model to tell them this.
Those who are self-employed – The self-employed will need to ensure they can find a lender who is happy to review the performance of their business over time to assess their affordability. Generally this means finding an organisation that uses manual underwriting rather than a computer to assess mortgage applications.
How to give yourself a better chance of obtaining a mortgage
There are a number of things that you should start to do when planning to apply for a mortgage (although you should actually be doing a lot of them already!):
- Consistently pay off debts on time, demonstrating that you’re fiscally sensible. Never miss a repayment.
- Check your credit file on a regular basis. There are a number of online providers who can help you with this. Check there are no items listed incorrectly or fraudulently on your file.
- Only apply for credit you think you’re actually likely to get: this will demonstrate responsibility. (You can check your credit file and score to assess your likelihood of gaining credit).Always keep your accessible credit to one or two things: if there are any existing credit cards you’re not using, then dispose of them.
- Pay off existing debts in full where possible: if there’s too much debt against your name when you apply, you might be considered too big a risk.
You can also better demonstrate financial stability by:
- Ensuring you’re on the electoral roll. This is part of the check for establishing your identity. Double check with your local council if you’re unsure.
- Ensuring that all debts are registered to your current address.
- Avoid any major changes (such as job switches) in the run up to the application. You need to demonstrate financial stability.
- Have a telephone landline in place. Again, a landline will demonstrate stability.
- Don’t make too many applications for credit in a short period, as this can indicate desperation.
This piece was written in association with the Ipswich Building Society. The Ipswich has always operated from a position of responsibility, never lending money to those who can’t afford it. They have also recently released a really interesting info-graphic looking at the changes in the mortgage application process: