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New Mortgage Rules

From the 26th of April, obtaining a mortgage will be even tougher.  The City regulator, the Financial Conduct Authority (FCA) is introducing new regulations to try and ensure that the last boom and bust financial crisis is not repeated.  Now lenders are required to do a full affordability check in the form of taking a closer look at outgoings.  All regular payments will be taken into account when determining if the borrower will be able to keep up repayments.  These could include the cost of things like regular haircuts, holidays and childcare.  The new checks will have a direct implication on how much a potential buyer will be able to borrow, and they will inevitably increase the time taken for the lender to consider the application.

Before the financial crisis, the housing market was booming, sales were frequent and lenders were keen to advance buyers a mortgage. Sometimes, however, this was done irresponsibly. In some cases, buyers were able to borrow the full price of a home, a loan on top of that, and then initially only pay back the interest. When property prices fell, some borrowers found that they’d overstretched themselves and could no longer afford the repayments.  Many others found themselves in negative equity.

What lenders will now be looking for, is how much spare money the potential buyer has in their budget.  This is effectively a ‘stress test’ to ensure that if interest rates go up (which they inevitably will, bearing in mind that interest rates are at an all-time low), and the monthly repayments increase accordingly, the borrower will still be able to afford them.  This new policy is going to lead to more intrusive questions for potential buyers.  Borrowers will be asked if they expect their financial situation to alter; changes in income or working hours for example. They could also be asked if they have plans to have children.

Many lenders have tightened up since the financial crisis anyway, so the Council of Mortgage Lenders says it expects the transition to the new rules to be ‘smooth’.  It’s worth pointing out here, that it won’t just be first-time buyers that are subject to the new regulations, but also those trying to remortgage.  The typical first-time buyer borrows £137,000, with those remortgaging borrowing £144,500.  There are currently 10 million mortgages in existence in the UK, with more than £1 trillion owed.

Sources: bbc.co.uk, cml.org.uk (image courtesy of moneyadviceservice.org.uk)