The new mortgage affordability rules were introduced on 26 April 2014 and there have already been reports warning that thousands of buyers are likely to be rejected under the new criteria.
The changes include a requirement that detailed financial advice is given to borrowers as part of the application process and the advisors giving that advice will need to meet professional standards. Another change is the abandonment of income multiples where as a rule of thumb a borrower or borrowers would obtain a certain level of borrowing based on their income multiplied by a figure which was dependent on age and some other factors. Instead now borrowers will be subject to more extensive scrutiny and can expect to face questions examining income and expenditure combined with a tougher verification of that information so as to remove self-certification by the borrower. The sorts of questions a potential applicant should now expect to be asked will be more intrusive than previous questions which focussed mainly on essential spending and will now range from what expenses they incur on groceries, eating out, alcohol and cigarettes, socialising, mobile phone contracts, TV and internet subscriptions, gym memberships and other hobbies, holidays, the cost of travel to and from work and the cost of other non-essential travel, parking costs, amounts spent on clothing and personal grooming, the costs of running their household are examined more forensically and applicants are now questioned about the cost of cleaning products etc. Bank statements and other evidence will be looked at to check that the information provided is genuine and accurate. Rather than just relying on credit checks lenders will look also take into account whether an applicant has previously gambled or taken out a payday loan.
Advisors will also need to base their decision on future considerations which may reduce income or result in higher expenditure. If a couple making an application intend to have children in the future then this will be taken into account, as would an applicant intending to leave a secure job and commence his own business.
Stress tests will then be applied to check that the applicant can afford to meet payments if interest rates rise. They are generally basing this calculation on a rise to at least 6%. A mortgage of £125,000 on a three year fixed rate of 3.00% would currently attract monthly repayments of £622. If rates rose to 6% the payments would increase to £847.
Indeed it has been noted that on some transactions where there has been a hold up in the chain, resulting in the mortgage offer expiring, buyers are applying again for an offer and finding that they are offered less second time round even though their circumstances remain unchanged. The danger is that a buyer moving home, even to a cheaper property, may not be considered suitable for a new product and so have no choice but to remain in their current property.
Whilst the new rules have caused some panic among the housing market the reasons for them are justified; their aim is to prevent another financial crisis as occurred in 2008. The application however is perhaps in certain cases too stringent. Housing prices in London are so unlike prices elsewhere in the UK that the new rules are likely to price many potential buyers out of the market and could therefore result in a housing crash leaving sellers in limbo. House prices in London have risen so drastically, reportedly in some areas at 18% per annum that there is clearly a real risk that the changes, if they force down prices, may even result in negative equity situations and kill off the housing boom.
The advice from Tara Dugdale at Ward Gethin Archer for buyers requiring mortgage assistance to apply earlier than they would have previously to prevent delays on a purchase.
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