New mortgage rules: How to get a loan – a guide for first-time buyers


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The Independent Online

Buying a house just got even more difficult.

From Saturday, anyone hoping to get a mortgage faces a inquisition of Spanish proportions following a clampdown on lenders by the City watchdog.

These days, getting a loan is all about affordability. Lenders have to show they’ve been responsible and not handed out loans to those who may not be able to afford them.

And that doesn’t just mean now, but in the future and in the event of an interest rate rise, when monthly mortgage commitments would go up.

They now have to do a so-called stress test - which forms a key part of the Financial Conduct Authority's new mortgage regulations - on your finances to ensure that borrowers can cope easily with a rise of, say, 1 per cent in interest rates.

That may seem a small increase, but could actually mean a 25 per cent hike in your monthly mortgage repayments. So if you had to repay £500 a month, you’d need to find an extra £125.

Can first-time buyers afford that? That’s the question that lenders will ask and you’ll need to demonstrate. How can you show affordability? Follow our five tips that will help you get a mortgage:

1. Check your spending
Before letting a lender see your finances, examine them closely yourself. What do your current account or credit card statements tell you? Do you have a lot of direct debits? Lenders will want to know what your future spending will look like and the first indication of that is regular expenses.

2. Cut your regular expenses back
Are there any of regular expenses you can cut back on? Regular ongoing commitments such as pension contributions, childcare costs or school fees could hit your chance of being approved for a loan but these are things you probably can’t reduce. Essential bills, such as heating and lighting, will also remain, but are you still using that gym you’re paying for? Could you cut your monthly mobile or TV costs?

3. Moderate your lifestyle
Are you spending a lot of money in pubs, clubs or restaurants? This is an area you could cut back on. You won’t need to lead a totally frugal lifestyle but it’s worth planning to moderate your nights out a few months before you plan to apply for a mortgage. It’s also worth bearing in mind that lenders may also look askew at regular payments to wine companies or bookmakers, considering them evidence of an expensive lifestyle.

4. Know what you can afford
Do you know how much a mortgage will cost you? There are plenty of online mortgage calculators that can show you at-a-glance how much monthly repayments will be on different interest rates. You’ll be able to see how much they will cost you now and how much they will increase if rates climbed by 1 or 2 per cent. With the latter figures do your own stress tests on your finances to see whether it looks like you really could afford to continue to meet your monthly repayments when rates go up. If it looks a close call to you, it will certainly look dodgy to a lender. Knowing that will give you a chance to make the changes you need to improve your affordability.

5. Check your credit report
Finally make sure your credit report is up to date. Contact Experian, Equifax and Callcredit  to ensure the information they hold on you is accurate and up-to-date and get them to correct any wrong data.

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