Tougher mortgage rules to come in


File photo dated 27/01/14 of for sale signs displayed outside houses in Finsbury Park, North London. House prices surged by 8.8% year-on-year in January as they continued to increase at their fastest pace since 2010, Nationwide has reported.  PRESS ASSOCIATION Photo. Issue date: Wednesday January 29, 2014. See PA story ECONOMY  House. Photo credit should read: Yui Mok/PA Wire

People applying for a mortgage face more probing questions into their spending habits when the biggest shake-up of the market for a decade comes into force in one month's time.

Toughened industry-wide rules means that from April 26, mortgage providers will take a keener interest in an applicant's outgoings, which could include what they spend on childcare, clothes, phone bills, hobbies, travel and season tickets, in order to work out whether or not they can afford their home loan.

Experts suggested the new mortgage market review (MMR) rules could also lead to some lenders tweaking their rates upwards slightly in order to manage a slower flow of applicants while they get to grips with the changes, while some borrowers could also find themselves offered smaller loans than they were expecting.

The crackdown aims to ensure there is no return to irresponsible lending and that people can only take on mortgages they can pay back and not debts which depend on house prices rising in order for them to be repaid successfully.

There are more than 11 million mortgages in the UK and the rules will also mean that lenders have to apply a "stress test", to ensure the loan would still be affordable if interest rates rose and the borrower's regular repayments were higher. More emphasis will also be put on the impact of known future life changes on the horizon such as retirement or redundancy.

Paul Smee, director general of the Council of Mortgage Lenders (CML), said the changes will bring about "the largest change to how the mortgage market works for a decade".

He said: "The industry has shown that it is ready, and we anticipate a smooth transition into the new framework."

The new rules have been anticipated for several years and much of the MMR has already been incorporated by lenders.

But the CML said that borrowers will find that procedures for giving advice will be more detailed. It has been estimated that an advised sale could take up to two hours or longer to complete.

Firms will need to ask more questions to find out more about a borrower's circumstances, so mortgage interviews could take longer and could be split into two interviews instead of one.

Lenders will have to find out more about how a borrower spends their money, including regular outgoings and payments on loans and credit cards.

Borrowers may find they need to produce more paperwork to back up what they say about their income or spending.

Documents they may need to substantiate their income include evidence of overtime or bonuses not captured on payslips, statements from employers verifying any irregular income and statements of income from investment or rental properties.

The changes will not only affect buyers but people looking to remortgage. People wanting to make changes to their existing mortgage may be required to go through an advised process and a new assessment to check whether their payments will be affordable.

Interest-only mortgages will still be offered, but they are likely to remain considered a "niche" product and customers will have to show they have a credible strategy in place to repay the loan when it comes to an end.

Last summer, regulator the Financial Conduct Authority (FCA) issued a "wake up call" to interest-only mortgage holders amid fears that up to 1.3 million customers do not have enough cash to pay their loans back.

Interest-only mortgages, which allow borrowers to pay off the capital only when the mortgage term ends, have become much more thin on the ground in recent years amid concerns about people not being able to repay their debt.

Yesterday, Office for National Statistics (ONS) figures showed that the average UK house prices rose to a new peak of £254,000 in January.

The figures prompted fresh concerns that Government schemes to support the housing market such as Help to Buy are pumping up house values in some areas and encouraging borrowers with small deposits to stretch themselves financially in order to jump onto the property ladder.

David Hollingworth, head of communications at broker London and Country Mortgages, said borrowers will "have to get used to" being asked more questions about their monthly commitments.

He said some people will need to get a clearer idea in their minds of what their monthly budgeting is, although "not every lender will be wanting to know your inside leg measurement" and some may want more detail than others.

While Mr Hollingworth did not expect to see a big change in lenders' mortgage pricing, he said it was possible that some lenders might "slacken off" slightly so their products are not at the top of the market and they can manage a more gentle flow of applications.

He said: "They may want to step off the gas and push rates up a little bit."

But he added: "I don't think you will see a sudden spike in rates because of lenders making these final changes. It's more a case of lenders filling in around the edges of what's already there."

Mr Hollingworth said some people may end up seeing a slightly lower borrowing amount on offer than they might have expected.

He said: "If you are spending that much money (on a mortgage) every month, you've got that much less to spend on everything else. It's about balancing the books, not just now, but if rates were to climb."

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