Mortgage clampdown: New rules will see borrowers grilled about their finances
The long overdue changes should ensure no return to the disastrous boom of the last decade
Personal Finance Editor
Thursday 24 April 2014
A clampdown on mortgage lenders means anyone hoping to borrow after Friday faces a major grilling about their finances.
From Saturday lenders are being forced by the City watchdog to ensure that any potential borrowers can afford to repay their home loan now AND could also meet repayments if interest rates rise.
The so-called stress test - which forms a key part of the Financial Conduct Authority's new mortgage regulations - will mean ensuring that borrowers can cope easily with a rise of 1 per cent in rates.
The rules are long overdue and should ensure no return to the disastrous mortgage boom of the last decade when many lenders ignored affordability rules and instead relied on soaring property prices bailing struggling borrowers out.
The regulator wants to ensure there's no return to that toxic loan period which led to the collapse of former major lenders such as Northern Rock and Bradford & Bingley.
But those applying for a loan now could face hours of questioning and will be expected to supply detailed evidence of their income and, crucially, their outgoings.
But that that doesn't necessarily mean it will be tougher to get a loan, as lenders will obviously still want to do business.
Paul Broadhead, head of mortgage policy at the Building Societies Association said: “It is understandable that people are concerned about the changes to the mortgage application process, however it is vital that the new regime does not dent consumer confidence.
“The Mortgage Market Review was introduced in order to ensure that a common sense approach to mortgage lending is applied by all lenders and that people are not borrowing more than they can afford to pay.
“A number of building societies implemented the process early and have been lending this way, without problems, for a number of weeks, in fact, the common sense approach has been taken for years.”
However, to increase the chance of being granted a loan, experts suggest cutting back on spending before you apply. Adrian Anderson, director of mortgage broker Anderson Harris, advised: “Cut back for three months before applying for a mortgage: pay off debts and simply spend less.
“In the past, borrowers reined back their spending once they had a mortgage and had to pay it each month; now you should act as though you already have that commitment in place and reduce your spending accordingly.”
What could hit your chances of getting a mortgage?
Getting a loan these days is all about affordability. Lenders are interested in any expenses that could make a mortgage unaffordable if interest rates rise.
So lenders will examine your bank statements to see what you spend your cash on. Regular ongoing commitments such as pension contributions, childcare costs or school fees could hit your chance of being approved for a loan.
Other direct debits will also be taken into account, such as gym memberships, pet insurance and mobile phones to paint a picture of how much money you go through each month.
Lenders may also look askew at regular payments to wine companies or bookmakers, considering them evidence of an expensive lifestyle.
Independent Partners: Get fee-free expert mortgage advice and find the right mortgage deal for you.
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