New regulations on the manner in which UK lenderís must assess prospective borrowers mortgage applications are set to be implemented later this week, with market analysts forecasting that it will substantially reduce the number of people who will be able to acquire a secured loan.
Aspiring borrowers should be prepared for a comprehensive dissection of both their income and their bank statements by banks and building societies when applying for a mortgage, as all their areas of current expenditure will affect their chance of acquiring their desired loan from April 26th.
This includes expenditure on childcare costs, online subscriptionís, direct debt schemes, music purchases, luxury items and even takeaways, and these will all collectively contribute to a lenders final assessment of how much they can afford to borrow.
Essentially, a borrower will clearly have to illustrate that they are financially secure at present and can comfortably afford monthly mortgage payments at present, and in the future when interest rates finally do rise. The new changes are part of industry regulator, the Financial Conduct Authorityís initiative to make the mortgage market safer and securer, by tightening up the criteria in which a borrower must adhere to in order to acquire a mortgage.
With the base rate of the Bank of England being held at a historic low of 0.5% since 2009, personal household debt levels have soared due to a half decade characterised by easy and cheap access to credit. With interest rate rises now on the horizon, it is feared that a personal debt crisis could emerge in the upcoming years as borrowers struggle to cope with higher repayment incurred by eventual rate rises.
In particular, market analysts have warned that those who have obtained cheap mortgages will be at the highest risk, as they will have to pay far more each month on their mortgage in the future than they signed up for. It is feared that with wage rises still relatively low and household debt levels at an all time high, that this could culminate in a multitude of householdís defaulting on their payments in the future and subsequently losing their home.
The new measures will seek to filter out those who are simply capitalising on the cheap nature of credit at present and are not well placed to be able to cope with higher expenditure demands in the future. Those who have a history of lavish spending on their bank statements, or have a high level of debt will either be unable to obtain a mortgage or will only be able to do so for a lower amount than they applied for, as lenders will no longer be prepared to distribute secured loans to those who are not suited to it.
Who are set to benefit, and who will struggle to acquire a mortgage?
Those with a high level of disposable income each month, a regularly added to savings account and an exemplary credit rating are set to benefit the most from the new regulations, as they will exude the impression that they are reliable debtors who will be able to uphold their repayment arrangement throughout their loan period.
Mortgage brokers have forecasted that people such as these could borrow as high as five times their current annual income, and this extends to partners with tip top finances as well as singular applicants. So an individual with a commendable financial history who earns £30,000 each year could acquire a mortgage as high as £150,000, whilst a couple who earn an equivocal salary each could collectively obtain a mortgage as high as £300,000.
Rob Killeen of mortgage broker Capital Fortune argued that those who illustrate that they have very few expenditure demands at present- zero dependents, no vehicle, no direct debits to their account and are self sufficient- could acquire a mortgage that is eight times as high as their salary, which highlights the importance of having a high level of disposable income each month when attempting to obtain a larger mortgage.
However, those with dependents and spend a fair amount on childcare will be negatively affected by the new regulations, with brokers forecasting that families with children will be unable to borrower a far lower amount than those who do not. Under the old system, lenders did not take into consideration an applicantís expenditure on things such as childcare, but the new system will evaluate these supremely closely and will likely lower the sums of money available to applicants who have to spend a great deal each month on their children.
This has led to questions about whether families will begin to reconsider having children straight away, as the reality is that childcare costs will now significantly impact the amount a household can borrow from their mortgage.
Longer meetings, comprehensive evaluation of bank statements
Applicants will also be faced with far longer waiting times in order to obtain a face-face meeting with an in-branch representative, with brokers estimating that this take as long as a month to set up from April 26th. Moreover, the meetings could now be as long as 3 hours, as lenderís subject applicants to as many as 40 questions on their lifestyle and financial history in order to ascertain their applicability as a future borrower and how much they can sustainably afford.
These questions could range from the quantity of cigarettes smoked a month, to the amount spent on alcohol, to an even more intrusive line such as on fast food, subscriptions and luxury purchases.
The current ëincome multipleí system has not been axed, though it will now function in a supplementary role to the new ëstress testí system. Previously, the amount a borrower could acquire would be between 3 and 3.5 times their current salary, which would drop to between 2.5 and 2.75 for couples. However, this has risen steadily in the past few years, as house prices have soared and earnings have stagnated, with lenders arguing that raising the multiple was the only measure which would enable people to bridge the gap between the two.
Jonathan Harris, director of mortgage broker Anderson Harris, summarised the distinction between the new and old system aptly when pointing out that previously borrowers would only be subjected to a moderate analysis of their banks statements from the past three months whilst “now, the bank is likely to go through them with a fine-tooth comb,”.
“These could be anything from pet or dental insurance to gambling payments or direct debits to wine companies.
“Our advice is to cut back for three months before applying for a mortgage: pay off debts and simply spend less. In the past, borrowers reined back their spending once they had a mortgage and had to pay it each month. Now you should act as though you already have that commitment, and reduce your spending accordingly,” he added.
Gavin Littlejohn, founder of the Money Dashboard website, called for applicants to adapt to the new regulations and heighten their chance of acquiring a mortgage “by properly budgeting and showing consistent behaviour of being able to live within their means”.
This means that aspiring mortgage owners will have to cut back on their ëluxury expenditureí such as on gambling, vehicles, alcohol, cigarettes and household itinerary in order to have the best chance of obtaining a mortgage that is equal to the value they applied for, with lenders likely to reduce the amount available for an applicant to borrow if there bank statements indicate that they have a high monthly expenditure of things such as these.
It has been forecasted that those with high levels of monthly outgoings, particularly from childcare, could have the total amount available for them to borrow substantially reduced, whilst those with a high level of debt and a poor credit history will likely be unable to acquire a mortgage at all.
Current income tested against higher future repayments
As well as testing applicants income against current mortgage expenditure demands, lenders will also be required to apply a second tier of ëstress testingí, which will enable them to analyse whether a prospective borrowers salary can cope with higher monthly repayments on their secured loan when interest rates are finally raised.
Mortgage brokers London and County have identified that they will adopt a ëstress rateí that falls somewhere between 6% and 7%, with Barclays subsidiary Woolwich echoing this sentiment and fixing their initial rate at 6.74%.
This means that for a mortgage applicant to have a high chance of acquiring their desired secured loan, they will likely have to have an income that comfortably covers current monthly payments, because they will have to clearly show that they can cope with mortgage payments at a current rate of around 3% and then further illustrate that it can stand up to substantially higher expenditure demands when interest rates eventually rise.
For example, a borrower who takes out £100,000 from Woolwichís two year fixed rate mortgage at a rate of 2.79% would have to pay back £463.50 on their mortgage each month under current rates and the pre-assumption that the repayment period is 25 years, but under the 6.74% ëstress rateí this would rise to a substantially higher £690.50 each month.
In order for a borrower to acquire the mortgage in the first place, they will have to have an income that lenders believe can cope with higher payments as well as current ones, and a prospective borrowers application can be rejected if they fail to illustrate that they can do so on both counts.
Although the FCA has forecasted that interest rates will rise by around 3.19% in the next half decade, they have yet to ascribe a fixed ëstress rateí for lenders to adopt, so expect a degree of subjectivity in the manner in which banks and building societies interpret their value.
The likelihood is that with personal debt levels at an all time high, wages only slowly picking up and rates set to rise sooner rather than later, lenders will adopt a relatively stringent stance on their distribution of secured loans, meaning that only those with a strong income and a low level of current household debt will be able to acquire a larger mortgage at present.
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