How much do you spend on milk every month? How much do you spend at the hairdressers? These are the sort of intrusive questions you could soon face when you apply for a mortgage.
Under new rules due to come into effect from tomorrow (26th April), lenders will be quizzing new mortgage applicants about their lifestyle and spending habits to determine whether or not whether they can afford a mortgage.
The changes, which form part of the Mortgage Market Review, are designed to put an end to high-risk lending and protect buyers from taking out loans that they might struggle to repay if their circumstances change.
What’s the Mortgage Market Review About?
In recent decades, loan decisions have been granted almost exclusively on the basis of an applicant’s income. But buyers with large expenses such as childcare fees or high commuting costs may face affordability problems that cannot be deduced from their income alone.
So lenders will now have to conduct interviews with new mortgage applicants to determine their income and expenditure in more detail.
Will There Be Delays, or Higher Costs?
The review will undoubtedly cause a few delays in the opening months. Some lenders have already reported that their advisors in city-centre branches and high-demand areas are fully booked for the foreseeable future. So if you’re currently house hunting and you haven’t yet sourced a lender, you might wish to bear this in mind.
There are also concerns that lenders will push up rates or fees, either to cover the additional cost incurred by the new regulations or to stem the flow of applications so that they don’t get overrun by the workload.
The Nationwide Building Society has created a workaround by offering interviews via video-link to connect customers with advisors in other parts of the country. It’s an approach that could reap rewards if buyers are not willing to risk missing out on their ideal property.
What Will Be Asked?
The other issue, of course, is how up-close and personal lenders decide to get. With many already following the tougher new rules, it’s evident that some are digging extraordinarily deep into spending habits as part of the new assessment.
The Monmouthshire Building Society, which has offered some of the cheapest variable-rate loans for first-time buyers this year, has issued guidance on what its affordability questions are likely to include.
It says it will ask about the occupants that will be living in the mortgaged property. If there are dependent children, it will seek clarification of childcare costs. It will also ask for details of major travel expenses.
Sample Questions: Monmouthshire Building Society
- Do you have childcare costs for dependent children?
- Details about the occupants living in the mortgaged property.
- Are there any significant travel expenses such as rail season tickets?
I’m Self-Employed / A Low-Earner. Will I Be Negatively Affected?
Local lenders believe that not a great deal will change in the way they approach applications. But there are concerns that applicants who normally struggle to get accepted for a mortgage – the self-employed or low earners, for example – could find it even tougher once the new rules are implemented.
Paul Winter, chief executive of the Ipswich Building Society, says that for these groups, a good credit file may not be enough to pass the new affordability process.
Some lenders will not allow applicants to verify their own expenditure, he said. Instead, they rely on a statistical model, much as a energy supplier does when it determines a new client’s monthly payments. This could be a barrier for prudent individuals who spend within their means, he said.
I’d urge borrowers to carefully review their financial position before applying for a mortgage and to find a lender that will let them verify their own expenditure rather than relying on a computer model.
Monmouthshire BS says that self-employed clients will need to provide the last 2 year’s trading accounts or an SA302 form. It will then confirm the figures with the client’s accountant.
What Will Applicants Need to Provide?
- 3 payslips.
- P60 form.
- 3 previous bank statements.
- Proof of savings.
- Self-employed clients: the last 2 year’s trading accounts or an SA302 form.
The Ipswich BS has said it is determined to help the so-called ‘mortgage misfits’ who would otherwise be disadvantaged by the new regulations. It has released an infographic to inform customers about the issues they face and how it will support affected customers.