New rules come into force today that will make getting a mortgage more difficult and take longer to arrange. They will require new borrowers to supply more information about themselves including what they spend their money on now AND for up to 5 years time. The changes represent the biggest shake-up in the mortgage industry for 10 years and are designed to protect consumers from the reckless mortgage lending that has been seen in the past and to help ensure that borrowers aren’t left unable to make their repayments.
Many of today’s newspapers have grabbed headlines about ‘lifestyle quizzes’ including what you might spend on haircuts, night outs and childcare, but the new mortgage rules go much further than this. Here’s a summary of the new changes:
More details of your income and expenditure
The rule are aimed at assessing the affordability of a mortgage so lenders have to take into account ‘committed expenditure’ and costs reflecting your lifestyle. The kind of things that will be included here are spending on council tax, utilities, ground rents, buildings and contents insurance, pension payments, car expenses and travelling to work, Other living expenses will include how much you spend on clothing, child care, recreation and other goods.
Lenders will also require much more documentation to prove your income and expenditure as well as a kind of ‘stress test’ – could you still pay the mortgage if interest rates went up 1% or more?
It will take longer to arrange a mortgage
If you are being advised on a mortgage then this may involve an interview of around 2 hours or even several interviews. Aside from all the additional proof required for income and expenditure, the interviews have to make much more certain that the mortgage is appropriate for you e.g. factors such as fixed and variable payments, the term of the mortgage, penalties for early repayment, explanation of fees etc. – these will all require a lot more time
‘Execution only’ mortgages
This means that you are receiving no advice and therefore you have to prove that you have researched the market and understand the commitments associated with the mortgage and all its features. The lender will also need to make a declaration that advice has not been provided to you – many lenders will probably not want to lend on this basis and will therefore insist the process has gone through a broker or advisor.
Very popular in the property boom a few years ago, but now becoming a very niche area of lending, partly because lenders have withdrawn from ‘interest only’. Lenders will in future need to examine closely your range of repayment strategies, including savings plans and ISAs (and their expected returns), evidence of bonuses or other ‘irregular’ income and proof of ownership of assets which could be sold to pay off capital.
Many of the above changes seem to be a matter of common sense but some lenders could be much more vigorous about investigating all the aspects of your life style spending and of your income. What is quite obvious though is that the whole process of applying for a mortgage will take longer and be more intrusive than ever before.
MoneyMoz Author – Richard Bloomfield