Will mortgage stress-testing cause stress to home buyers?

Tue 29 Apr 2014 by Lorraine Imhoff

Written by Lorraine Imhoff

Your mortgage application is likely to take longer to process after 26 April. You can also expect a much more intrusive investigation of both your income and expenditure, and may have to attend an interview with a lender even when you are applying through a broker.

The reason is that new rules affecting mortgage applications have now come into force. These Mortgage Market Review (or MMR) rules are intended to 'stress-test' mortgage applicants to make sure that they do not borrow more than they can comfortably afford, even if interest rates rise in the future.

But concerns have been raised that these new rules will cause delays to conveyancing transactions as mortgage applications will take longer to process.

The rules apply to both mortgage lenders and brokers or other intermediaries, and will mean that they will require much more information about applicants.

New MMR rules will affect most borrowers

The MMR rules will affect both new borrowers and existing home-owners who want to sell and are applying for a mortgage to buy another home. They may also affect borrowers seeking to re-mortgage a property or to vary an existing mortgage.

So just because you already have a mortgage does not mean to say that you will automatically be able to borrow the same amount when you apply for a new loan.

The purpose of the new rules is to stop irresponsible lending practices. It was widely thought that one of the reasons for the 2007 financial crash was that many mortgage lenders gave large loans to borrowers who would struggle to meet the mortgage repayments.

Lenders did not always require proper proof of borrowers' income, and self-certification of income was widely accepted.

Mortgage underwriters worked on the basis that property prices would continue to spiral upwards, so the lender would always have sufficient security to recoup the loan even if the borrower defaulted. On that basis lenders were often preprepared to lend in excess of 100% of a property's value.

Interest-only mortgages were freely available and buyers were rarely expected to show how they would be able to repay the loan at the end of the term.

Major changes under way to mortgage application process

All that is now changing, as lenders must follow much tighter rules. Instead of basing lending on the assumption that property values will continue to rise, lenders must not now enter into a mortgage unless they can demonstrate that the new or varied mortgage contract is affordable for the customer.

Borrowers will not only have to provide much more detailed evidence of income but their regular expenditure will also be investigated.

The new MMR rules are likely to make things more difficult for people who are self-employed or employed on a fixed-term contract.

Those who rely for a significant part of their income on overtime, bonuses or commission may also find it more of a problem to get a mortgage for the amount they would like, as they will have to show that they have a realistic expectation of receiving similar amounts in the future.

Tighter scrutiny of income and expenditure

Borrowers' outgoings will also be scrutinised. Exact details may vary between lenders, but they will be interested in:

  • The customer’s committed expenditure such as credit card bills, maintenance payments.
  • Their basic essential expenditure such as council tax, insurance and gas and electricity costs.
  • Basic quality of living costs of the customer’s household

 When buying a leasehold flat the borrower will have to include any ground rent and service charges as part of their basic expenditure. This means that details of the amounts payable will first have to be obtained from the seller of more usually the freeholder or managing agents, another potential source of delay.

Borrowers will not only have to show that they will have sufficient household income to afford the regular monthly mortgage repayments as well as their other expenditure, but that they would be able to continue to pay the mortgage if interest rates rise in future.

Although the new MMR rules do not prohibit interest-only mortgages it looks as if these will be much less attractive in future. Borrowers will be required to prove that they have a viable scheme in place to provide for the repayment of the mortgage at the end of the term.

Longer mortgage application procedures will cause delays to sellers

Any delays in handling mortgage applications will obviously affect sellers, and could lead to a slow-down in property sales. There are already indications that agents in some parts of the country are only prepared to accept offers from cash buyers or existing owners ho have already sold their property.

Prospective buyers can help themselves by ensuring that they have all relevant information to hand before looking for a mortgage. This will include payslips and other evidence of income as well as full details of projected household expenditure.

Nevertheless buyers can expect to find themselves under pressure from sellers who will be anxious to know that a mortgage application is proceeding. Seller's agents are likely to want frequent updates, and the chances are that agents will leave the property on the market until the buyer has received a definite mortgage offer.

Sellers are also likely to instruct their Solicitors not to proceed with the conveyancing to any great extent until they receive confirmation that a mortgage offer has been issued to the buyer. More sales will probably fall through as sellers lose patience with buyers who are waiting for a mortgage offer, and put property back on the market.

All in all it looks as if the MMR rules are perhaps more stringent than they really need to be and could set back the recent recovery in the housing market.

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