From today it will take longer for a British buyer to get a mortgage with the introduction of the Mortgage Market Review (MMR) and some claim it will also be harder. There have been lots of headlines suggesting that applicants will be quizzed on what they spend on eating out, and even on hair cuts.
For a start we should not lose sight of the thinking behind what is one of the most radical changes in the mortgage market for decades. Remember that before the economic crash of 2007 it was really easy to get a mortgage, it could be done over the phone and people were not only being offered four times or more their salary but also 110% of the cost of the home they were buying. We certainly don't want to go back to that.
But there have been criticisms that the type of questions could be too intrusive and that a bank or building society is being too nosey when it comes to asking about spending on gym membership and other lifestyle choices.
The Financial Conduct Authority, the UK's financial watchdog, points out that the reforms are aimed at making sure the mortgage market is sustainable and works better for consumers. 'It had become clear by the height of the market in 2007, that, while the mortgage market had worked well for many people, it had been a cause of severe hardship for others. The regulatory framework in place at the time had proved to be ineffective in constraining particularly high risk lending and borrowing. The MMR package of reforms is aimed at ensuring the continued access to mortgages for the great majority of customers who can afford it, while preventing a return to the poor practices that we saw in the past,' says the statement from the FCA.
It means that lenders are fully responsible for assessing whether the applicant can afford the loan and they have to verify the customer's income. Actual income can be determined pretty easily through wage slips and bank statements. But MMR takes the process further and lenders say they have to make sure that an applicant can actually afford the mortgage repayments, hence the questions about spending.
And it is not just about being able to afford the payments at the time the mortgage is taken out. The new rules add stricter filters to the mortgage application process, including an interest rate stress test. So a lender will want to know if an applicant can still meet the repayments when the current historic bank base rates start to rise.
But there is no need for immediate panic. There are transitional provisions in the MMR that allow lenders to provide a new mortgage to customers with existing loans who may not meet the new MMR requirements for the loan. The borrowing is not able to exceed the amount of their current loan, unless funding is required for essential repairs. The decision on whether or not to lend in these cases remains with the lender.
But it is first time buyers who will perhaps suffer. They are often young couples who have been saving stringently for years to afford the necessary deposit, according to some commentators. My view is that if they have been saving for a deposit then that shows their ability to manage their money and this should be taken into account.
What holds them back from getting on the property ladder is not necessarily the costs involved in the actual purchase but other costs such as property tax, moving costs, legal fees etc.
Also there seems to be a desire to want everything to be perfect right away, a new house, new furniture, all the latest white goods and high tech television. When I bought my first home, a two bed terraced house almost 30 years ago, I had no washing machine, a second hand cooker, sat on cushions on the floor until I could afford a sofa and still have the bed I bought then. Buying a home was the important thing; all the trimmings can when and as I could afford them. I would also like to seen an end to new home developments where they offer a choice of white goods etc as this can only add to the cost of a new property and encourage the 'I want it all' attitude.
At the same time lenders need to be reasonable. If a couple spend £60 a month on gym membership then they are demonstrating that they are taking a healthy approach to life and therefore are more likely to be in a position to look after themselves, stay in work and be able to pay their mortgage. A £60 hair cut (yes it can cost this at many women's salons) every two months is not extravagant, nor is eating out now and then. I don't think applicants should be penalised to listing this kind of spending but at the same time wages are not on the rise again so this should be taken into account when making a judgement about the ability to pay if interest rates go up.
What MMR mustn't do is discourage first time buyers as they are the lifeblood of the property market. Many experts think any slowdown in mortgage applications will be temporary but there are some side effects to be considered. For example, Lucian Cook, head of residential research at Savills has pointed out that first time buyers could be forced to rent for longer if their initial application is rejected and this could force up rental prices, making it even more difficult to save for a deposit.
This could be avoided if the lettings industry make longer leases available so that younger people can be assured that they can let a home for say three to four years while they save for their deposit without the worry of having to move again when a lease comes to an end. I believe that a sensible approach from lenders, letting agents and landlords can help to make the new rules less of a burden. But first time buyers also have to be realistic and realise that they can't have it all on the first day they move in.
Ray Clancy
Editor Property Wire
