If you’re planning on buying a home or re-mortgaging in the coming months, it might be wise to start reining your spending in now.
Thanks to a new set of rules called the Mortgage Market Review (MMR) — officially due to come into force on April 26, but already being followed by many lenders — stricter affordability checks will be applied to anyone wishing to apply, or reapply, for a mortgage.
In a nutshell, the rules aim to make sure people who can afford to repay their mortgages continue to get access to them, while preventing any return to any irresponsible lending behaviour of the past.
So even if you’re not planning on applying for a mortgage for some time, housing market experts warn that lenders will probably want to sift through between three and six months of bank statements to work out what your spending habits are.
As well as taking particular notice of the outgoings you might expect — regular household bills, childcare, the cost of your daily commute food and debt repayments — they may also pose questions about aspects of your spending you haven’t even realised would be picked up on — some mortgage brokers have seen examples of lenders probing bills to the milkman, or a one-off flutter on the horses.
While no one expects you to live a saintly existence, experts say lenders will want to see you are living within your means. So, if you’re a bit stretched financially, now could be the time to ditch your weekly takeaway extravagance in favour of a trip to your local budget supermarket.
Lenders will also be applying “stress tests”, which will check not only that you can afford your mortgage payments now, but as and when interest rates start to rise.
With lenders needing to check your habits more thoroughly, you may also notice that the process of taking out a mortgage takes longer than in the past. Firms will need to ask you more questions to make sure that a mortgage product is the right one for you, taking into account your personal circumstances, and the Council of Mortgage Lenders (CML) says the “overwhelming majority” of mortgage sales will be advised, taking two hours or even longer to complete.
Even if you just want to make a change to an existing mortgage, you will be affected by these rules and may find the process takes longer.
Some lenders may split the sales process into two separate interview sessions, and y ou’ll find yourself having to rummage around more to find paperwork to back up what you say, so get all your payslips, bank statements, and evidence of overtime or bonus payments lined up.
As well as trying to work out how you spend your money now, lenders will also try to gaze into their crystal balls to work out the impact of any anticipated life changes on the horizon, such as retirement.
Interest-only mortgages, which allow borrowers to pay off the capital only when the mortgage term ends, will still be offered under these stricter rules, but they will be considered a “niche” product — if you want one, you will have to show you have a credible strategy in place to repay the loan when it comes to an end.
Last summer, City regulator the Financial Conduct Authority (FCA) issued a “wake up call” to interest-only mortgage holders amid fears that up to 1.3 million people do not have enough cash to pay their loans back.
This type of mortgage has become much more thin on the ground in recent years amid the concerns about people not having sufficient plans in place to pay their home loan back.