We can report that tough new mortgage regulation is on the way and prospective borrowers should know what it means. From April 26 the mortgage market will change forever because, after years in the making, revolutionary new regulations are being introduced.
The new rules will rightly tighten rules around affordability checks and income verification.
Firstly, lenders are going to be much more intrusive in checking how much individuals spend each month. There are reports in the press that they will be checking the smallest things such as magazine subscriptions and how much you spend on Christmas presents. Kensington Mortgages recently revealed 43 lifestyle questions in order to help them assess affordability.
The new checks to be rolled out across the board, could even include how much you contribute to your pension or spend on haircuts according to some lenders. It will be a tougher process and borrowers should go into this with their eyes wide open and be prepared.
As a Company we have learnt some lessons and for over 12 months been have been internally conducting a detailed analysis of spending patterns from bank statements, well before an application even goes to the lender. All brokers will now need to do this and we believe professional advice on affordability is crucial, well before an adviser scours the market for the best available deals.
Secondly, there will be much together checks on how much you earn as well as how much you spend.
In the past borrowers have been able to “self-certify” their own salaries to lenders. These were dubbed liar loans, such was the extent that borrowers exaggerated their incomes to get bigger loans. It led to some risky lending and we supported the FCA in outlawing these. We were openly criticised by IFA's and Brokers in the trade press for daring to state that everyone can prove legitimate income and we are pleased the Regulator held firm on this issue. Most lenders have already moved to a new system of checking every person’s income and making sure it is accurate.
There is no doubt that the new rules have made life harder for the self-employed or those with variable pay from commission or bonuses.
Lenders have become more rigid in their income checks and it can be a frustrating process for some. However, our experience indicates that lenders armed with full information, can take a view.
Again, we would argue this is where tailored advice is crucial to get the best deal and make the most of your income.
Some lenders underwrite loans through credit checks and some do it through human underwriters. Mortgage advisers will know which lenders to approach if you have an unusual case or you are self-employed.
Specialist advice and knowledge of lending criteria can help massively in these situations so it is worth picking up the phone to a broker.
As well as checking spending habits and income much more closely there are other new rules too.
Most mortgages will be sold on an advised basis. This is a break from the past where some banks would offer mortgages through non-advising sales staff rather than qualified advisers.
For buyers and some remortgages banks will now have to advise everyone but do not need to scour the market.
Independent brokers and comprehensive brokers are still the only option for searching the whole market and packaging your application for you.
The final change is crucial too and it is over interest-only mortgages. They are not banned but they have been seriously curtailed.
Both the Financial Conduct Authority and lenders have withdrawn significantly from this space in the last few years.
The new rules are more stringent about how you repay the capital on the house at the end of your mortgage.
Liquid savings or house price rises are not allowed so you will need a robust repayment plan to give to the lender and it will be regularly reviewed.
Even then it is difficult to get an interest-only deal without expert help from an adviser.
We are pleased to see the mortgage market becoming more professional so consumers should be aware of the changes.