Mortgage applicants face new rules
A mortgage lending clampdown comes into force today which will see lenders delve more deeply into people's personal lives, from their plans for parenthood to how they will spend their old age.
The industry-wide changes affect home buyers and people looking to re-mortgage and they will mean that lenders have to take a much stronger interest in people's spending habits and how their life plans could affect their ability to meet their repayments.
Mortgage applicants will need to sit through longer interviews, provide more paperwork to back up what they are saying and could find themselves taken aback by the probing nature of some of the questions they will be asked.
The Mortgage Market Review (MMR) rules aim to ensure there is no return to any irresponsible lending practices of the past.
But some concerns have been raised that it could slow down the housing market, which has been springing back into life over the last year, as the industry adjusts.
Each lender will have their own interpretation of the new rules, but in general people are likely to be asked for more detail about regular outgoings such as childcare, food, household bills, loans, credit cards, toiletries, hobbies and leisure activities, in order to weigh up whether or not they can afford their home loan.
Lenders will also look for any impact that future life changes could have, such as when they plan to retire and how they plan to spend their old age. There have also been reports of some people being asked if they are planning to start a family as lenders gear up to comply with the rule changes.
Brokers warned that some people could find it hard to answer the open-ended questions being asked by lenders.
Andrew Montlake, a director at broker Coreco, said that for people considering applying for a mortgage: "It's important for people to prepare a lot earlier, potentially six months before you apply. Start looking through your documentation and go through a budget."
Mr Montlake said most lenders will want to know whether mortgage applicants are planning to increase their spending for any reason in the near future and if they are expecting a change in their income.
He said such questions are: "Quite open and difficult to answer" but he added that "people need to be honest with their affordability anyway".
Ray Boulger, senior technical manager at mortgage adviser John Charcol, said that people may find themselves in a "difficult position", when lenders put questions to them about what may happen in the future.
He said that if a couple have a child and one parent stays off work for a year to look after the baby, the family may say when they apply for their mortgage that the parent is planning to go back to work.
But, if going back to work incurs childcare costs, Mr Boulger said the lender may focus on this extra expense rather than the additional income generated from having both parents in work.
Mr Boulger said: "The danger is that a mortgage that is difficult on one single salary could get declined on the basis it's not affordable. Different lenders are reacting to this in different ways."
Martin Wheatley, chief executive of the Financial Conduct Authority (FCA) was asked this week by the Daily Mail about reports that some people are being asked by bank advisers if they are planning to have children.
Mr Wheatley told the newspaper: "If you are eight months pregnant, that is a reasonable question. But most of the time that is probably too invasive - and that is not committed expenditure. People have a right to a certain degree of privacy.
"People should be expected to talk about known costs, such as school fees and car loans, but planning for future unknown events is a much more difficult space."
A spokeswoman for the FCA said that lenders will need to strike a "balance" between when to ask about the possibility that a couple might drop to one income by starting a family and when this is not appropriate.
Lenders will also have to apply "stress tests" to make sure someone could still afford their mortgage as and when interest rates go up. In some cases this could involve having to prove you would be able to pay a mortgage with a 7% rate of interest.
Although the new rules do not formally come into force until today, in practice, lenders have been gearing up for them for some time as they have been anticipated since a discussion paper in 2009.
Lloyds Banking Group, which is the country's biggest mortgage lender and incorporates the brands Halifax, Lloyds Bank and Bank of Scotland, has been MMR-compliant since April 14.
It said in a statement: "We have taken a proactive approach to ensure a smooth implementation of any changes required as a result of the MMR, many of which were already in place.
"As a responsible lender, we need to ensure that mortgages taken out by customers suit their needs and circumstances, therefore we are fully supportive of the Mortgage Market Review."
The changes mean that new customers of the Lloyds group may see their interviews take around 15 minutes longer than they would have done previously, taking the average length up to around two hours.
Lloyds said the additional questions that the groups' customers might see will be focused on imminent changes to their lives that can be backed up with evidence. For example, this could relate to someone planning to cut back on their working hours or take out a loan.
Where planned changes are less certain, such as when the applicant has a child who wants to go to university in the coming years, these will be considered as part of the advice when the group's mortgage advisers make their recommendation.
Paul Broadhead, head of mortgage policy for the Building Societies Association (BSA) said: "It is vital that this new regime does not dent consumer confidence or sentiment in the housing market.
"The Mortgage Market Review was introduced in order to ensure that a common sense approach to mortgage lending is applied by all lenders and that people are not borrowing more than they can afford to pay.
"A number of building societies implemented the process early and have been lending this way, without problems, for a number of weeks."