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Mortgage reform may put home loans beyond reach

First-time buyers with weak credit records could struggle to secure a mortgage

First-time buyers with weak credit records could struggle to secure a mortgage

With tighter rules on access to funds more people will be shut out, writes Jeff Salway

BORROWERS have been warned to brace for new mortgage market rules that are expected to drive up loan rejections and
result in longer application times.

The mortgage market review (MMR), launched five years ago in the wake of the housing market downturn, finally takes effect next weekend.

The aim of the overhaul is to boost consumer protection and prevent a repeat of the excesses that fuelled the property boom prior to the financial crisis.

New rules require lenders to take full responsibility for borrower affordability, rather than leaving it to intermediaries, and carry out robust stress tests to ensure customers could repay their loans at higher interest rate levels.

Among the other changes is a greater distinction between advised and non-advised sales that will mean far more people going through qualified advisers when applying for mortgages.

There’s also stricter criteria for interest-only loans, which has already had the effect of virtually killing off that market.

The shake-up is expected to result in more loan rejections and longer application processes, due to the additional paperwork required as lenders look more closely into each borrower’s income and expenditure.

Mark Dyason, director of Edinburgh Mortgage Advice, said: “One lender told me that if they see gambling transactions on a bank statement they will want six months of statements to check, rather than three.

“This type of requirement will delay lending decisions.”

Almost six in ten lenders believe the new stress tests could lead to a rise in mortgage rejections, recent research by the Intermediary Mortgage Lenders
Association revealed.

Brokers are even more concerned, with a survey by industry publication Mortgage Strategy finding that seven in ten think it will be harder to get a mortgage under the new rules.

“My main worry is that lenders overreact when it comes to these new changes, as they have been known to in the past with the rules on interest-only,” said Alison Mitchell, mortgage expert at Edinburgh IFA Robson Macintosh.

Existing homeowners as well as new buyers will see a change in the process, with many having to undergo fresh affordability assessments when they make changes to their mortgages.

There has already been a slowdown in application processing as lenders have begun implementing the changes, said Dyason.

“We are already seeing lender backlogs and service breakdowns as the training required for teams impacts on current applications,” he said.

“If lenders are MMR ready, as they tell us, why has the Council of Mortgage Lenders called on the regulator to take service breakages lightly after implementation? It suggests a lack of confidence in the systems put in place.”

Some lenders have already introduced more robust stress tests based on an interest rate rise to 7 per cent within five years. The result of those tests will affect the size of the mortgage that some borrowers are allowed to take out.

But application stage problems are less likely to hit borrowers who go through intermediaries, said Mitchell.

“One of the main changes is that the lender takes responsibility for affordability checks, hence the stories of people being turned away and applications taking longer,” she said.

“But we can ensure that borrowers are a step ahead of the game and understand the criteria of the lender in question.”

Some borrowers will lose out, she warned.

“But if they can’t produce the evidence needed by lender then they probably shouldn’t be getting the mortgage in the first place.”

So what can you do to ensure you’re not adversely affected by the new rules? The most important step is to strengthen your affordability case before making an application.

That means checking your bank statements and going through your expenditure to ensure your day-to-day finances are in place before they are scrutinised by a lender.

“Remember: rejections will probably show up on your credit record, making it even harder to get a deal in future.

“The changes come into force in a housing market more upbeat than the one in which the MMR was drawn up.

“The wider housing market is going to have a brake put on it and in areas where it is more heated, the use of bridging to get the property off the market will increase because swift mortgage applications will become far more challenging,” Dyason predicted.

 

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