“Introducing such a major change to the mortgage market at the peak of the house buying season is bizarre and somewhat foolhardy,” says Paul Winter, the chief executive of Ipswich Building Society. Mr Winter believes that the new mortgage regulations could be much better timed, and he is adamant that so-called “mortgage misfits” should not lose out as a result of them.
As part of the new Mortgage Market Review due to come into effect this weekend (26th April), lenders will be required to undertake more detailed affordability checks on mortgage applicants. Lenders will have to conduct interviews with new applicants to investigate their lifestyle and spending habits.
Inevitably, there are concerns that the stricter lending criteria could make it harder for so-called “mortgage misfits” to get onto the housing ladder. Categories including self-employed applicants, small business owners, and those who earn below £25,000 a year, could all be more vulnerable to rejection from banks that use an automated assessment system.
But the Ipswich Building Society has pledged to help these groups who would otherwise lose out as a result of the stringent new guidelines. Below, Paul Winter, its chief executive, answers ten questions about the new mortgage guidelines and Ipswich’s approach to them.
Q1: What did you consider to be the biggest issue with the old method of assessment?
Ipswich Building Society as a manual underwriter has always carefully assessed mortgage applications for affordability and used salary multipliers as a model to assess the appropriateness of a loan to a borrower. Our lower than average arrears rates is a reflection of this diligence.
Pre-2008, not all lenders were as cautious and careful and hence the new regulations from the FCA are appropriate to ensure the lending excesses of that time are not repeated. However, I believe there could be an unintended consequence of the new affordability methodology as credit worthy borrowers on lower incomes or the self employed may find it harder to meet its requirements.
The new regulation will ensure all lenders meet strict affordability rules and whilst this will offer valuable protection for some, the process if also holds the risk of denying credit worthy borrowers the chance to own their own home. 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.
Q2: Do you think the new system will make it easier or harder for people to obtain a mortgage?
It is possible that some individuals even with good credit files may not pass the new affordability process; for example, those on incomes below £25,000 and the self-employed. Furthermore, some lenders will not allow applicants to verify their own expenditure and rely instead on a statistical model. This could be a barrier for those prudent individuals who spend less than the considered ‘norm’.
Q3: How do you think the new system will work with the Government’s Help to Buy scheme? Do you think the new process will encourage that first step onto the housing market?
Help to Buy has fuelled house prices since its introduction; whether MMR could potentially pop this bubble we will wait to see. Introducing such a major change to the mortgage market at the peak of the house buying season is bizarre and somewhat fool hardy.
Q4: Pay increases continue to be stagnant yet house prices are increasing. What would your advice be to those looking to get onto the property ladder? Do you believe there is enough new and affordable housing?
We want to help more people to have a home to call their own. We believe that we need more new houses, both for those that aspire to be home owners and for those that wish to be tenants, whether through a housing association or private landlord. The Government has made many interventions to increase housing demand and it now needs to place the same energy into increasing levels of building.
Q5: Do you think the MMR will have an effect on competition between lenders in the market?
It is possible that availability of mortgage lending will reduce as lenders implement new processes. Furthermore, MMR will increase the administrative costs of a mortgage; this could see an increase in market rates.
Q6: Do you think the broker will become a more popular choice?
Under MMR you can only perform a mortgage sale under an advised or execution only basis. A lot of mortgage lenders pre-MMR offered their mortgages on a non advised basis. From 26th April this is not an option and lenders need to decide to switch to advised sales or to not sell mortgages directly at all. (Execution only can be adopted for online or post sales only). If lenders decide to not offer advice then brokers will see an uplift in business. At Ipswich Building Society we are offering advice to those who want to apply to us directly and we continue to work with brokers as well.
Q7: With the MMR coming into affect on 26th April 2014, longer interviews have been predicted. What effect do you think this will have when wanting to make an offer/ receiving an offer?
MMR shouldn’t impact the overall time it takes for a mortgage to complete. The duration of a mortgage interview will be longer as lenders are required by MMR to obtain more information than they did before. Potential borrowers need to make sure they are ready for the mortgage interview, they should have copies of their bank statement to hand and know how much they spend on bills, repaying debts and other items such as fuel and groceries.
Q8: How has Ipswich Building Society responded to the MMR and how are they helping their customers get on the property ladder?
We are fully MMR compliant and have maintained our existing income sources. We will continue to offer flexibility in our underwriting, including allowing applicants to verify their own expenditure with us rather than using a computer model. We will continue to accept income sources such as pensions, overtime, rental incomes and accounts from the self employed.
Q9: Does MMR affect those looking to re-mortgage?
Under MMR existing mortgage holders can be handled under ‘transitional arrangements’. For our own existing borrowers if they didn’t meet the new requirements of affordability under MMR we would review their case to see if we could use a transitional arrangement to process their mortgage.
Q10: For someone earning £25k or less and wanting to get onto the property ladder, what advice would you give?
For any potential borrower we would suggest the following hints:
- Think about your spending habits now. Check your income and out-goings and see if you can make any savings.
- Review your debts and pay off as much as you can before applying for a mortgage.
- Check your credit file and make sure your credit score is as healthy as possible.
- Close any credit accounts you don’t need, for example unused credit cards and overdrafts.
- Be prepared for your mortgage interview, have copies of your bank statement to hand and know how much you spend on bills, repaying debts and other items such as fuel, groceries and other day to day costs.