Mortgage Market Revolution
Posted on 17 March 2014
Bank statements may not be the most interesting topic of conversation, but someone finds them interesting - your mortgage lender. And following the implementation of new regulation on 26th April 2014, you might need to be more interested in them too!
If you have not heard yet, there is a Mortgage Market Revolution taking place which affects everyone, (and I mean everyone) looking to borrow money on a property as a security. And the new revolution slogan is 'Affordability, advice and responsible lending.'
Ahh, this wonderful word - affordability...Surely borrowers know for sure how much they can afford, never borrow beyond their means and have never found themselves in financial difficulty?
Even yours truly can only answer 'yes' on the first point and 'maybe' on point two and three, and of course that situation was a) beyond my control b) no-one could have predicted and c) I have learnt my lesson now, never to make the same mistakes again!
You see, prior to 2007-2008 credit was freely available, quite often to people with heavily adverse credit and even more often, with no particular requirements for proof of income. It was too easy to obtain a mortgage for borrowers and lenders alike and this is what the FCA – (Financial Conduct Authority) and its mother - the FSA (Financial Services Authority) thought.
It is not what the borrowers think they can afford but what the lenders consider the borrowers can afford, now AND in the future. Let's face it - it's easier to afford the mortgage when the interest rates are sub 2%, or even 4%. What happens when they increase to 5, 6, or 7%? I can see many of you, dear readers, starting to twitch and turn at the mere mention of 7% interest rates. It is an uncomfortable thought, and you are right. As I hear you say that Mark Carney has given every indication that if interest rates increase, this will be gradual in the medium term at least, and the Bank of England Base Rate is not expected to increase beyond 2-3%. Apparently the FCA is not concerned in medium term forecasts and is looking far beyond into the future by asking lenders to apply stress tests on mortgages far higher that the actual rates borrowers will be paying.
Let me rephrase it: regardless of what is the initial rate on your mortgage now, the lenders will start by considering what your payments will be at a notional interest rate which could be two or three times higher than your actual rate.
And here is where your bank statements come into play, dear readers. With the new Mortgage Market Review rules, which came into force on 26th April, your bank statements will now take centre stage, playing a pivotal role on how affordability is assessed. Your income and expenditure will now be put under a microscope. It is no longer the case that a lender takes your income, multiplies it by four and produces a decision in principle. (A note for the estate agents: I hope you do realise you may as well stop asking for mortgage Decisions in Principle as they will not be worth the paper they are written on).
Lenders and the FCA have come quickly to realise something that was known to brokers a long time ago - borrowers net income depends not only on salary, but various other elements - grade pay, allowances, shift pay etc on the plus side as well as on deductions for flexible benefits, student loans, pension contributions, season tickets etc. As a result of that, two people on the same income can receive very different net pay in their payslips. But also very importantly - if it does not show up on your bank statement - it does not exist.
The second group of information - cost and expenditure - is crucial as well. Banks will be interested to know not only the core expenditure - utility bills, mortgages, loans, credit cards, insurances, investments, school fees etc, but also life style expenditure. That £80 that you pay for pet insurance or the £135 that you spend every 3 months at your hairdresser can make or break your mortgage approval.
With more and more people moving to online banking and electronic bank statements, how many of us actually do conscientiously check their online banking, print and check their bank statements? I think is time you dig those passwords and login details and start printing.
If you'd like to find out more about how MMR might affect your mortgage application, why not call the consultants at John Charcol? 0844 346 3672
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