Homebuyers will face tougher checks before being granted a mortgage, under new rules for lenders that came into force on 26 April. The changes, which follow the FCA’s mortgage market review (MMR), will mean borrowers are required to give more detail about their spending habits when they apply for a mortgage to ensure they can afford to pay loans back should interest rates rise.
Many types of borrowers, from first-time buyers to remortgagors, will be affected by the new rules, aimed at preventing the irresponsible lending practices of the past, although buy-to-let or second mortgages are not covered. Interest-only mortgages are permitted under the MMR rules, but only if there is a “credible strategy for repaying the capital”.
Some of the key changes under the MMR rules include:
- Lenders, rather than intermediaries, now assume full responsibility for verifying a borrower’s income and scrutinising their personal finances in order to assess whether the borrower will be able to afford the repayments over the first five years of the mortgage loan.
- One instrument by which to do this is affordability stress testing. This will involve assessing how well applicants would cope with a rise in interest rates. Lenders will be able to decide what interest rate to apply for the test (typically, around 7%).
- Mortgage lenders will ask to see information about income and outgoings, and how these might stand up to a rise in interest rates, for example, childcare, food, gym membership, household bills, loans, credit cards and leisure activities.
- Applicants will have to tell lenders if they expect their incomes to go up or down.
Anyone who applied for an agreement in principle on a loan before 26 April, or who has applied for a mortgage and wants to make a material change, for example, borrowing a greater amount, will have to start the application process all over again.