What is the Review About? When Does it Start?
The Mortgage Market Review (MMR) comes into effect on 26 April 2014. It has been designed to prevent the high-risk lending that sustained the housing market prior to the financial crisis.
Back in the 2000s, lenders were regularly issuing 100% mortgages and interest-only loans which the regulator had little power to control. This left a lot of homeowners struggling to afford their repayments when the crisis struck.
Under the new MMR, lenders will subject homeowners to stricter affordability tests to avoid situations where they can no longer afford to repay their loans.
The discussions to reform the mortgage market began in 2009. A new set of rules were established by late 2012, which had to be implemented by April 2014.
Some lenders have already started applying the tougher new criteria, which should make the transition smoother.
What Changes for Consumers?
More Thorough Checks / More Intrusive Process
From 26 April, those applying for a mortgage or a remortgage will face a far more probing and intrusive assessment of their finances than they would have experienced in the past.
Previously, banks used to calculate affordability by multiplying an applicant’s income to generate the amount they could borrow.
Now, there is greater emphasis on spending habits to ensure that an applicant’s outgoings will not hamper their ability to repay the loan, even if their monthly payments increase.
Mortgage applicants will face greater scrutiny on various areas of their expenditure, including credit card commitments, insurance costs, school fees and commuting costs. This allows a lender to determine whether or not the applicant will be able to afford their repayments if interest rates rise.
Compulsory Mortgage Advice
Another change from the review is that almost everybody will receive mortgage advice from a lender as part of their application. Even if a borrower goes to an independent broker, they will still have to undergo a consultation with any lender that they wish to apply to.
This measure is expected to lengthen the process – initially, at least – as prospective borrowers rush to sign up for a limited number of appointments.
The FCA has published a brochure outlining the changes, which is available from lenders, mortgage brokers, and the FCA website.
Lenders will have to advise most mortgage applicants as part of wider affordability checks on new customers.
What Will You Need from April?
- Proof of Income
After 26 April, applicants will still need to provide proof of their income as part of their application.
Lenders will expect to see payslips or account books, bank statements, and details of any funds in savings accounts or income from investments.
- Proof of Expenditure
Applicants will almost certainly be asked for proof of expenditure too.
This may include (but is not restricted to): council tax statements, household bills, credit card statements, travel costs and insurance policies.
Some lenders will go into more detail than this, and may even ask for bank statements to look for proof of your spending if they are not satisfied.
- More Time, Resolve, and Patience
Mortgage applicants will need to prepare themselves for a more time-consuming process. They should also expect to face more personal questions.
Some lenders are proving more scrupulous than others, trying to account for every penny that a client spends. Questions that have reportedly been asked include how much clients spend on milk, how much they spend at the hairdressers, and how often they have friends round for dinner. (Find out more.)
It's proving difficult for some lenders to recognise the bounds of common sense, so applicants will need more patience and resolve if they wish to get their loan approved.
The new 'stress' test may also live up to its name during the application process. Some lenders will apply a hypothetical mortgage rate of up to 7% to a mortgage loan to see if applicants will be able to afford repayments under extreme circumstances.
What this means is that some homeowners who have never struggled to pay their mortgage may not pass the new 'stress test' - even if they are looking to buy a small home or move to a cheaper mortgage deal.
Lenders will be able to offer new deals to existing mortgage holders even if they don’t meet all of the criteria demanded by the reforms, though this decision will remain purely at the lender's discretion.
What’s the Next Step? Stick or Twist?
Mortgage experts are advising any prospective homeowners to start gathering all the evidence they may need as soon as they decide to apply for a mortgage or remortgage, which will help to speed up the process.
If lenders find mistakes or missing evidence, they are likely to return the application, which adds a further delay.
New borrowers may choose to ride out the storm and wait for the industry to adjust to the new measures. Banks will train more staff to cope with the advice-led demands of the new review, while brokers will help consumers to speed up the process as they become more familiar with the new system.
But the tougher requirements for lenders could push up the cost of mortgages, while an anticipated increase in the Bank of England base rate next year could also see lending rates rise. At the same time, house prices are rising at a robust pace, which puts buyers in a weaker position as the new rules approach.
Equally, it is possible that the MMR could calm a buoyant housing market, lowering the rate of annual house price growth while buyers strengthen their position to satisfy the demands of the new system.