Applying for a mortgage?
The UK mortgage application process is undergoing the largest changes in a decade on 26thApril 2014. Many lenders have already implemented these changes in anticipation of the formal change.
At the heart of the changes, known as the Mortgage Market Review (MMR), is the new affordability check. Previously the amount a borrower could borrow was a simple multiple of earnings with some basic checks on spending. Under the new rules, bank statements and all personal spending will be reviewed with a ‘fine tooth comb’.
Effectively, the lender will be looking to see that not only has the borrower shown they can afford the mortgage now, they are also looking that that they could also afford the mortgage as and when interest rates increase with close scrutiny of existing spending and not just salary.
Borrowers should expect to have a detailed review of their spending, with reference to their bank statements. This will include reviewing spending on child care, fast food, smoking and luxury together with non-luxury purchases.
All spending is now considered and it is advised that borrowers run their bank account as if they were already paying a mortgage for some months before applying for a mortgage. Many borrowers’ bank statements show them spending all of their income each month on the basis that the borrower plans to ‘cut back’ once they are paying their mortgage. This will no longer be acceptable as lenders will need to see that there are funds available each month, at the application stage, which would pay the cost of the mortgage. The lender will be looking to see that not only can the borrower afford the monthly mortgage payments; they can also afford their existing regular spending. It will be difficult for a borrower to provide this if they are spending all of their wages each month prior to the application and cannot show that they have the monthly money currently free to pay the mortgage.
The ‘Stress Test’
There is also now a new ‘stress test’ element of the lenders application process. Lenders will look at how the interest rates are predicted to change over the next 5 years. They will then review your affordability to include any predicted interest rate increases and your affordability check will need to confirm that your current income and spending could also cover the cost of any mortgage payment increases as a result of interest rate rises.
No fixed interest rate has been issued for the ‘stress test’ however as an indicator, Barclays have set their ‘stress test’ rate at 6.74%. This means that any borrower hoping to secure their maximum lending will need to show that not only can they comfortably pay a mortgage at the existing rate of around 3%, they will also need to illustrate they could also afford to pay their mortgage at an interest rate of 6.74%.
As an example, if you borrow £100,000.00 from Woolwich at a rate of 2.79%, your monthly payments would be £463.50. Using the ‘stress test’ rate of 6.74% this monthly payment would increase to £690.90 each month. As a borrower you must show you can afford the higher payment of £690.90, not just the lower payment.
Lenders are looking for proper budgeting and a consistent behaviour of living within your means. If this is not evidenced the amount of lending will be reduced, or possibly completely refused.
It is predicted that the new rules will only impact on between 2.5%/11% of borrowers. It is anticipated that going forward, those with a strong income, a regular history of saving, an exemplary credit rating and low level current household debts will be able to acquire a larger mortgage. It is forecasted that those falling in to this group will be able to secure up to 5 times their salary.
Some tips before applying for a mortgage
- Reduce your debt (Remember debts are deducted from the amount you can borrow)
- Save regular amounts each month
- Live within your means and not within your overdraft/credit card
- Do not plan to cut back once you are paying the mortgage, cut back now.
- Spend as if you are already paying your mortgage
Sheri-Anne Mizon is a Partner at Attwaters Jameson Hill Solicitors specialising in all residential property matters including first time buyers buy to let investment buyers and shared ownership purchases. She and her team will ensure your transaction is dealt with professionally, efficiently and as quickly as possible and help support you and your family at every stage.
If you have any other questions or would to discuss your purchase with Sheri-Anne please feel free to telephone or email.
Direct Dial 0208 498 6578