There has been plenty of scaremongering in the news over the past few weeks regarding the new changes to mortgage assessment. As a nation that values home ownership immensely these doom and gloom headlines naturally cause people to worry about the future. I have had plenty of calls regarding these news reports and this article is a summation of my responses.
I can understand the concern. The majority of my clients have at least one property, most probably have a few, and the ability to purchase in the future or to remortgage them, perhaps to release capital, perhaps just to maintain a good investment, is paramount.
Headlines such as these will rightly cause many to wonder if things have gone too far:
“Need a mortgage? New rules mean you’ll have to ditch all those little extras
The Mortgage Market Review, which comes into force on 26 April, means lenders will have to check every tiny detail of your finances down to the last purchase of an app
“The mortgage inquisition: Borrowers face tough new quiz to get a home loan which could spell the end of cheap fixed rates, warns watchdog
The changes are part of what the government and Financial Conduct Authority have snappily titled “The Mortgage Market Review” or MMR. Given that searching for MMR on the internet turns up a far more divisive and controversial topic, you can’t help but wonder who thought that abbreviation was wise? The changes are designed to ensure that we don’t cause another “Credit Crisis” as seen in 2007/08.
There are 3 significant changes coming into effect: Affordability is going to be scrutinised by the lender and bank statements will need to be provided in each case to demonstrate a client’s outgoings. Lenders will use potential future interest rates of 7% to judge is a mortgage is affordable and everyone will have to be ‘advised’ on their mortgage (something myself and any residential broker will already have been doing) which means many of the banks staff will have to retrain their staff.
Of course the reality is, that aside from applications taking longer, bank statements being required in almost all residential cases, and potentially reduced mortgage loans, you probably won’t see such a significant difference as the papers will have you believe.
So here are a few reasons you don’t need to panic just yet, whilst the reports in the newspapers do carry a few valid points, they are mostly sensational and exaggerated.
With regards to the “mortgage inquisition” the Express wrote:
“They will take a close look at all your spending as well as your income to get a far more detailed picture of whether you can afford your mortgage repayments.
“Banks and building societies will want details of existing credit commitments, such as credit cards or personal loans and will also want to know how much you spend each month on food, energy bills, pension contributions and even childcare.”
Some lenders may ask how much you spend on commuting, child maintenance, student loans, household insurance, life cover and private school fees.
If you have moved home or changed job several times recently, or even if you have applied for several credit cards or personal loans in a short period, lenders may also want to know why. Equally, if you have been in your job for less than two months, you may be asked to hand over details of your previous employer and salary.
In addition, you will have to produce a fistful of payslips to confirm any bonuses, overtime or commission.
You will also have to provide documentary evidence of your deposit, such as a savings account statement.
All the information you supply will be matched against any data held by credit reference agencies such as Equifax and Experian, to make sure they tally.
Of course lenders have been doing exactly this for years now, even on Buy to Let! Santander and Virgin Money, two of the most competitive buy to let lenders on the market currently, still require brokers to provide expenditure information, deposit proofs, payslips and information on credit commitments for customers buying property to let even though they are not formally part of the criteria.
When it comes to residential mortgages, your mortgage brokers have been quietly accounting for your general expenses and demonstrating that loans are affordable for many years, and that isn’t going to dramatically change after this weekend.
What will change is that the lenders are now responsible! Previously they would generally take our word for it that we had done due diligence and established the loan was affordable, now they will be the ones poring over your bank statements.
So how will this affect you? Well as someone who has spent the past 10 years looking at peoples bank accounts, as a bank employee and then as a mortgage broker, one thing I can say with certainty, is that bank accounts never paint a clear picture.
The problem, no context. Consider the expensive restaurant bill that appears every 3 or 4 weeks? The bank won’t know that perhaps you and friends meet regularly, but you pay on your card to get reward points or cashback and your friends give you cash. The bank might think you spend a large amount on eating out and decide to include that sum as a regular expense. How about the time you had to draw £350 cash one day and £200 the next, could have been a B&B bill where cards were discouraged, could have been money you owed a friend or maybe a cash in hand payment to a mechanic for car servicing. Lenders are going to want to know about these transactions and will have to decide if they are regular expenditure or simply you spending the disposable income you’re entitled to.
With that in mind, if you are considering a residential mortgage, think about how your bank statements will look to a strangers eyes. If you can separate your bills and your spending accounts so you have regular income, regular direct debits and bill payments in one account and general spending in another, you will make it easy for an underwriter to see what’s what. During the 3-4 months prior to an application keep a very careful watch on how the accounts are run ensuring there is always surplus for bills and that you don’t need to stray into an overdraft. Lenders are aware their name will shortly be appearing on the statements and if it’s evident that you always keep an eye on this, they will be more confident you will do the same for their commitment. Perhaps also consider what items will appear and how easy it is to explain them. Generally lenders are looking for credit that hasn’t been declared, regular expenditure that’s been left off the application or signs of financial stress or other ‘red flags’ such as gambling sites. Everyone has their vices and passions that they probably spend a disproportionate amount of money on compared to others, but in the run up to a mortgage application make sure anything unusual can be explained or evidenced easily.
One of the big changes I will be making, will be to request clients bank statements very early in the process. Firstly because I need to ensure the figures are correct and considered as the lender would see them. Secondly because an items the client takes little notice of could be picked up by an underwriter and adversely affect the mortgage outcome.
It will also provide time to get hold of paper bank statements in the rare case that online banking isn’t available or acceptable (some lenders still don’t produce online statements that look like those posted to clients, meaning they are unacceptable to underwriters – the irony is that sometimes the lender won’t accept statements produced by their own online banking systems!)
The second, probably most significant, and immediately noticeable change will be as the Mail describes here:
Lenders will have to ‘stress test’ all loans to check the borrower could still afford them if interest rates hit seven per cent.
At present, the average two-year fixed rate mortgage charges 2.37 per cent. For a family with a £100,000 loan, this means monthly repayments of £442.
If the rate was seven per cent, the monthly bill would balloon to £707, an increase of £265 a month or nearly 60 per cent. Mr Wheatley said the changes could affect house prices, which are currently rising by around ten per cent a year.
The bottom line is that clients will need to demonstrate they have disposable income sufficient that the mortgage at 7% will consume no more than 50% – 75%.
This is going to be tough for first time buyers, those with a family or those on lower incomes, but is this such a significant change to the past year? I took an application I made for a client in September 2013, over 6 months ago and re-input the same income and expenditure figures into Santander’s online affordability calculator. The result was exactly the same. Santander have clearly been working to these figures for over 6 months now and I expect the majority of high street lenders will have too.
The third change is in regards advice. If you have ever been into a bank for a mortgage, and asked the assistant if you should take the tracker or the fixed rate, or the 2 year or 5 year deals, and been shocked when they put up their hands and tell you they can’t recommend either way, then you have been in an ‘execution only’ sale. The Post Office typically provided these kinds of deals, and clients are on their own in picking the right options. Whilst most clients are happy to weigh up the pro’s and con’s of particular products themselves, the advice becomes beneficial when asking how the lender might react to certain criteria, or asking which might be quickest, which might be best for certain types of property or any one of the multitude of factors involved in a remortgage or purchase.
Now all mortgages must be advised, and there will be many banks who simply do not have sufficient staff trained and regulated to meet the demand, especially following the lean years after the recession. Currently around 50% of mortgage applications go directly via banks. That’s a huge number of applications and most expect significant delays in getting an initial appointment, let alone getting an application underway.
So whilst the articles are based on fact, and they may affect anybody who might think about taking a mortgage in the near future, even buy to lets due to the increased paperwork and delays caused, the reality is that it’s going to cause annoyance and frustration rather than significantly change the property landscape.
The country and economy has come through far more significant changes over the past few years and life goes on, I don’t expect this any more than another bump in an already somewhat rocky road.