The long awaited Mortgage Market Review has been published by the Financial Services Authority (FSA) with the new rules to come into effect on 26 April 2014.
The review will introduce rules that put “hard-wired common sense” and affordability at the heart of the mortgage market and will prevent future borrowers ending up with a mortgage they cannot afford.
Affordability test
One change which we are already seeing in the mortgage market is affordability. No longer will lenders be able to simply offer a potential borrower a mortgage based on a set of income multiples. Lenders will now have to take into account a borrower’s net income, as well as committed and basic essential expenditure and how a future interest rate rise would affect mortgage payments.
Interest Only Mortgages
While lenders have been rapidly pulling out of offering interest-only mortgages over the last year, the new rules say that they can be offered to anybody who shows they have a credible repayment strategy – but relying on rising house prices will not be enough. Lenders will also be able to check these repayment methods remain in force throughout the term of the loan.
It is said that about 41% of all mortgage are currently on an interest only basis, including 34% of regulated residential mortgages, the remainder is mainly made up of buy to lets.
Existing borrowers
Although the start date for these new rules is 18 months away one measure will be activated immediately to help existing borrowers that cannot meet the new affordability requirements. These are people who are trapped by today’s tighter lending criteria – the so called ‘mortgage prisoners’.
Lenders can ‘switch off’ the affordability and interest-only requirements for existing borrowers who want to get a new mortgage for the same amount or less, providing they have a good repayment history – however any lending decision is a commercial one, but lenders will be able to use these arrangements to take on the customers of other lenders and are not allowed to treat these customers less favourably than other customers.
Other customers
Although widely predicted, older consumers have not been affected as the new rules do not apply any age limits or prevent lending beyond retirement.
The self-employed can also get a mortgage as lenders have the flexibility to decide what type of evidence of income to accept from customers with their own business.
Advice
Perhaps the most important feature of the Mortgage Market Review is that everyone should look to take advice when looking for a mortgage. A true mortgage adviser will assess your situation and use knowledge and experience to ensure you get the very best deal that is based on your individual circumstances.
Many people are unaware that by going to the Bank for a mortgage you will not get a recommendation based on your individual circumstances, you will simply get offered a product and then the decision will be yours.
Your mortgage is one of the biggest decisions you will make, make sure you get the best advice.