THE retired and the self-employed are among those paying the price for new rules aimed at clamping down on irresponsible mortgage lending which have left many people struggling to secure loans.
Lenders have been accused of using requirements that took effect with the Mortgage Market Review (MMR) on 26 April last year to freeze out retired borrowers and leave some others trapped on their most expensive rates.
Under the rules, borrowers must go further than previously to prove they can repay their mortgage and lenders have to take full responsibility for ensuring borrower affordability.
The changes also spelled the end for self-certification mortgages (widely known as “liar loans”), while lenders withdrew from the interest-only market well before they came into force as the regulator tightened its definition of acceptable repayment vehicles.
The worst fears of chaos in the market as the new rules were introduced were not realised. Most lenders were ready well before the implementation date and experts say that with advice on mortgages now compulsory the market has become more professional.
“It’s fair to say that some of the more apocalyptic predictions we heard last year have not come to pass,” said Robin Purdie of independent mortgage adviser MOV8 Financial. “There had been fears that the new regulations would stall the recovery in the market or, worse, lead to a sharp drop in sales. These concerns have proven largely unfounded thus far.”
There have been some difficulties, however, and several unintended consequences. Complaints persist about lenders being inconsistent and often unreasonable in their demands of borrowers. For example, the way in which childcare costs are assessed can vary significantly between lenders, for example. While one lender will assume higher costs the more children there are, another might assume they remain the same.
“It can be frustrating when a lender isn’t seen to take the sensible approach and is adamant their way is best,” said Alison Mitchell, mortgage expert at Edinburgh IFA Robson Macintosh.
“One example is when they ask for documentation that isn’t actually available, such as Nationwide wanting a final notice for child tax credits when this isn’t actually issued until the end of the tax year.”
Some lenders include pension contributions in their affordability tests, leading to instances of borrowers being advised to stop saving.
“Lenders do apply more stringent affordability checks, and certain types of borrowers have been affected more than others,” said Purdie. They include the self-employed, who have often lost out because lenders typically insist on proof-of-income documentation that they may not be able to provide.
But it is older borrowers who have found it most difficult to secure a loan under the MMR, with lenders insisting on evidence of future retirement income that many cannot produce. Several lenders lowered maximum age limits in advance of the MMR taking effect, with most now set at 70 or 75.
HSBC was recently accused by the Financial Ombudsman Service of an “unfair application of its age policy” after being judged to have wrongly rejected a mortgage application on the basis of age. The FOS upheld a complaint against the bank from a couple who were only in their forties but had their application turned down because the husband would have been over 65 when the loan term ended. “The bank relied on untested assumptions, stereotypes or generalisations in respect of age,” said the FOS.
The MMR has also created a new legion of so-called “mortgage prisoners” – borrowers who took out their loan under the more relaxed affordability rules but who can’t get a deal under the new regime. A growing number of people reaching the end of their fixed rate deals are consequently being shifted on to variable loans that could rise quickly when interest rates climb again.
Yet lenders doing that are ignoring transitional provisions introduced with the MMR allowing them to waive elements of the new affordability requirements for existing customers.
Those affected include borrowers on interest-only deals that have become increasingly rare over the past three years.
“Homeowners on interest-only have found it hard not being able to continue on the basis they have and some aren’t able to remortgage away from their current lenders due to the tight affordability rules,” said Mitchell.
“This goes for people wanting to move up the ladder as well. Their choice has been greatly restricted and some may become mortgage prisoners through no fault of their own.”
One in ten mortgage borrowers – around 770,000 people – could be left trapped on deals that make their repayments unaffordable when interest rates rise again, according to research last year by the Resolution Foundation.
“When rates start to rise they will most likely look for a new fixed rate product, but they could find that their options are limited due to changes in circumstances since the current mortgage was taken out,” said Purdie.
“Have they had kids or become self-employed, for example? Is the mortgage interest-only or does the term of the mortgage run past their state retirement age? This could also be the case for those borrowers currently in long-term fixed rates who wish to review their options when the rate expires.”
With lending criteria varying significantly between different lenders it’s more important than ever for borrowers to research their options before buying or selling their home or even remortgaging, he added.
“They should not assume that just because their current lender has lent them a large amount in the past they will be able to borrow the same amount again,” Purdie warned.