New April mortgage checks could hit affordability

Updated: 

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If you're shopping for a mortgage, get a move on. That's because from April a new regime of tougher affordability checks arrive which may hike overall charges. The new changes will focus more on monthly expenditure rather than income multiples, the traditional way of judging mortgage affordability.

In other words, more scrutiny, more paperwork, more stress. Is there any upside?

The only way is up

Not much of one. Think of the new changes as the Government paving the way for future interest rate hikes as the Coalition wants to make sure it can't be accused of encouraging reckless lending when rate rises really start to bite (only a matter of time now).

A cluster of new checks will feature so-called 'stress testing' to see how applicants will cope when rates start to climb. For example, a couple with a joint income of £35,000 and £26,000 - totally income £61,000 - potentially might expect to borrow between £170,000 and £240,000.

Affordable

Let's say they borrow £210,000 on a overall tracker rate of 3.99% over 25 years. That's a monthly repayment cost of £1,108. Were rates to climb by just 1% - not much in historical terms - the monthly repayment rate would soar to £1,227 - an increase of £119. Some of the new affordability checks have filtered down via new Help to Buy schemes.

"Borrowers who have not been through the mortgage application process since the peak [in 2007] will be amazed at the changes," David Hollingworth of mortgage broker London & Country told the Guardian.

"A lot more paperwork has to be provided and there is a lot more scrutiny of documents such as bank statements and anything might need to be substantiated. This is supposed to go towards making a better, considered lending decision."

Price rises

This morning Barratt released a trading update and made it clear the controversial Help to Buy scheme was having an impact on the number of new homes it's selling - and the prices it's able to charge new buyers.

Some of the market changes like Help to Buy, Barratt said, "have "driven up our average selling price ('ASP') and for the period we expect total ASP on completions to increase by c. 13.7% to c. £211k (2012: £185.5k), with private ASP up by c. 11.4% to c. £225k (2012: £201.9k)."

So double pressure on new buyers: more checks in an environment of (yet again) rising prices. So expect a new era of caution. If you've a slender deposit, the Post Office is about to enter the 95% mortgage market fray in conjunction with Help to Buy, though no rates have been announced.

Inflation slips

Santander is offering a tracker with Help to Buy with a two-year deal at 4.49% above base rate, meaning 4.99%. It's also offering a 4.99% fix for two years - probably a more prudent bet in the current environment. Check out, also, HSBC's two year fixed rate at 4.79%. Cheaper still.

Any good news? The news that the Bank of England has hit its 2% inflation target - for the first time in four years - means less pressure on a rate rise. For the moment.

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The people who affect house prices

The people who affect house prices