From 26th April, first time buyers and home owners may find it tougher to take out a mortgage thanks to strict new rules being introduced for lenders and mortgage advisers.
The reforms, stemming from regulation known as the Mortgage Market Review (MMR), have been introduced to curb lenders giving mortgages to people who may struggle to repay their loans.
High-risk lending practices which, at the mortgage market’s height in 2007, often saw borrowers over-burdened with unmanageable housing debt.
In this article, we explain the major changes to the ways in which you can get a mortgage, and how you make sure you’re in the best position to borrow when you do apply for a home loan.
How will lenders assess how much I can borrow?
One of the major new introductions is an affordability assessment that must be carried out by your lender. Previously, you’ve only needed to declare how much you earn for your lender to calculate the size of the mortgage their willing to give you.
Under the new rules, lenders will want much more information to see if you can really afford repayments. This will include essential expenses, such as utilities, food and council tax; buildings insurance and ground rent and service charges (for leasehold properties); cost of living, such as clothes and childcare; and other debt repayments, such as credit card bills.
This will enable lenders to take a much more forensic look at your finances to assess whether or not you can actually afford to repay a mortgage.
So, does that mean I can’t borrow a ‘multiple’ of my income, like before?
Under the old mortgage rules, lenders would look at your annual income before tax, and then multiple that by four or five to calculate how much it would lend you.
This method still applies, but the new affordability assessments that are being put in place mean that you might not be able to borrow as much as you could in the past.
How do I have to prove my income to a lender?
You’ll need to provide three of your last payslips to a lender in order to prove how much you earn if you are employed by a company. If you’re self employed, you’ll need provide three years’ worth of HMRC tax returns.
Under the old mortgage system, ‘self-certification’ allowed borrowers to certify their own income without producing the usual evidence. This sometimes led to borrowers overstating their income and burdened by mortgage debts they couldn’t afford.
It will no longer be possible to ‘self-certify’ your income.
What other tests will I need to take?
Lenders will now have to take account of possible future fluctuations in the interest rate when deciding how much to lend.
This is because mortgage rates often rise along with interest rates – which are currently at a historic low of 0.5%. So, lenders will test out different scenarios to see whether or not you could afford your repayments if interest rates increase.
What if I want to pay off my mortgage after I retire?
If the term of your mortgage ends after you retire, your lender will have to make sure you’ll be able to afford repayments on the income that you receive from your pension, or any other source of income you have in retirement.
This will vary depending on the lender, and how long after your retirement your mortgage will last.
How have mortgage advice rules changed?
This is another of the big changes. If you want to take out a mortgage for the first time, remortgaging, or transferring to a new product with your existing provider when your deal has ended, you’ll need to take full mortgage advice. This can be from an independent mortgage broker, or from an adviser in a bank or building society.
You may not have to go through the strict affordability checks every time you want to transfer to a new product or remortgage. But if you’re borrowing more money, or making a change that could affect your affordability (such as extending a mortgage into retirement), you’ll need to carry out an affordability assessment with your lender, regardless of whether you’re a first time buyer or on your fifth or six mortgage deal.
When you first speak to an adviser they have to tell you what their charges are and how they are paid, and if there are any limits to the range of mortgages they can recommend for you .
Can I ever take out a mortgage without advice?
In certain circumstances, some lenders will let you take out a mortgage without advice. You can usually apply for it by post or online, but will need to know all the details of the deal you want to take out.
But if you are a mortgage professional, taking out a mortgage for businesses purposes, or a ‘high-net worth’ individual (you earn over £300,000 or have assets over £3m), you can take out a mortgage without advice.