Banks using intrusive and cutthroat questioning technique to lower mortgage offers; is this a bad thing?
Banks are utilising a highly invasive line of questioning during meetings with mortgage applicants in order to slash tens of thousands of pounds off the total offered to aspiring home buyers.
That is according to a number of first hand sources who have identified that even the sporadic areas of their expenditure, such as on golf clubs, restaurant dining and grooming, have been enquired about in order for their bank to determine how much to offer them.
The new found intrusive line of questioning is due to a new mortgage lending system that was imposed on banks last month, which has necessitated that they analyse the financial history of applicants more closely in order to prevent unreliable debtors from obtaining a cheap secured loan under present low borrowing costs.
Market analysts had previously forecasted that mortgage applicants should be prepared to have their bank statements and expenditure ëgone through with a toothcombí, so that only reliable debtors who the bank are confident will be able to consistently make repayments, both now under current interest rates and in the future when rates rise and mortgage payments are higher.
And the Telegraph has released some compelling evidence to suggest that banks are utilising the regulations in order to significantly lower the sum of money they offer as a mortgage to aspiring homeowners, even if they are given clear evidence that the applicantís salary and expenditure is stable enough to afford the loan on a long term basis.
In one case study, a woman who had previously been given a mortgage of £100,000 under the old lending regulations was forced to have her application reassessed under the new rules. She was going to use the mortgage in order to purchase a property valued £175,000, and had enough money to pay a 40% deposit on the house. However, due to the bank identifying that she had extra expenditure costs on council tax and ground rent, that werenít made clear in her first assessment; she was given a substantially lower offer of £82,000.
The Sunday Times also reported that many mortgage applicants have been subjected to a reduction in their mortgage offer as large as £100,000, as the financial sector have sought to clamp down on borrowers acquiring large loans that they simply will be unable to afford in the future.
The new affordability checks involve a number of questions about a mortgage applicants gambling history, whether they have obtained a payday loan in the past, whether they lavishly spend on luxury items, and how frequently they go out to places such as bars and restaurants. It has been reported that a number of banks have gone even deeper with their line of questioning; enquiring about how much an applicant spends on things such as grooming, makeup, travel and furniture, as well as asking questions about the borrowers future, such as their ambitions and whether they wish to start a family soon.
As well as the affordability checks, new stress testing has been introduced which will see a borrowers current salary being tested against repayment sums determined at current rates, and then at higher rates of around 6 or 7% for when they do rise in the future. The borrower will have to illustrate that they have a sufficient level of disposable income to cope with both payment sizes, with market analysts forecasting that the new procedure will make it difficult for people to remortgage in the future as well.
Whilst the meticulous and somewhat intrusive nature of the banks questioning methods have justifiably garnered a negative response from consumers, it should not be forgotten that the instigation of the new lending system is entirely a good thing that will serve to benefit both the property market and the personal finances of a plethora of households across the UK in the long term.
The societal hypersensitivity that almost always seems to manifest in controversies such as this, might hinder the full implementation of the mortgage system, and detract attention away from why it was devised in the first place- to stop people with low and middle incomes who simply cannot afford a mortgage on a long term basis from acquiring a secured loan by capitalising on borrowing costs being so low for the last 5 years.
By granting banks the power to comprehensively analyse a mortgage applicants financial history, they are giving them a clear and easy way to make responsible decisions with their mortgage lending, and this will prevent people who desire a house, but have no means of affording it over an extended period of time, from taking on a huge level of debt that will inevitably come back to haunt them when the Bank of England does eventually raise its base rate from 0.5%.
Some will argue that this can be achieved by simply adopting the ëstress testingí aspect of the new lending system, which entails a mortgage applicants current salary being tested against mortgage repayments with present interest rates, and then being tested again to see whether it can hold up to higher payments in the future when rates do eventually rise.
However, an accurate identification of whether a mortgage applicant will be able to afford higher payments in the future cannot simply come from looking at figures and seeing whether the sum of an applicantís salary is high enough to hold up to higher payments.
Instead, it is entirely necessary to look at areas of expenditure, such as on gambling and on hobbies, because this will give lenders a far more detailed idea of how reliable a debtor an applicant is.
Similarly, asking about an applicantís future priorities, such as whether they see themselves being self employed or starting a family soon, are important questions to be posed in order for lenders to have a clearer idea of what borrowers expenditure will be when rates rise in the future.
By giving banks this power, some will argue that they have simply been given license to intrude even further into peopleís everyday lives; this is simply not true, this is the financial authorities giving banks the chance to do something positive for people and the property market, but functioning in a parental role, so that only people who can afford mortgages for the entirety of its loan term will be able to get one.
The rest will have to wait to enter the property ladder, and as the parental role they have been given necessitates, this will involve telling some people that they cannot get a mortgage at present.
The knock on effect of the regulations is also that demand should fall, which will lower the chance of the market overheating and a bubble occurring as prices begin to stabilise.
A great deal on responsibility has been placed into banks hands, particularly because the decisions they make now will have a significant long term impact on the financial condition of millions of householdís in the future, as well as the state of the property market. The system was after all introduced in order to prevent the mistakes of the previous generation manifesting again in todayís property market, and regulators are keen to avoid a crash at all costs.
Yes, the line of questioning might be intrusive and even offensive to some people. But if the price for a more stable property market, where the gap between supply and demand is narrowed, and the number of people putting themselves at long term financial risk is lowered, then surely having to face up to a few questions you donít like is worth ensuring this manifests in reality.
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