A third of home buyers are unaware of the potential impact of the new affordability rules on their mortgage application, according to research carried out by Equifax in association with What Mortgage. We take a look at the results in more detail which suggest that home buyers are still getting used to the more detailed financial insight required by lenders
For the past year anyone taking out a mortgage is likely to have been subject to more rigorous affordability checks, as a consequence of the new affordability rules introduced on 26 April 2014.
These new regulations resulted from the Mortgage Market Review (MMR), a comprehensive review of the mortgage market carried out by the financial services regulator between 2009 and 2012.
Lenders are now obliged by the financial regulator to employ stricter rules when it comes to assessing mortgage applications. They must ensure that you can afford to repay your mortgage, not just now but in the future, so they ask more probing questions about your finances than they did pre-MMR.
Whilst the rules are for lenders to adhere to, they could have consequences for consumers, but research undertaken by Equifax in association with What Mortgage has found that just over one third (35 per cent) of people are not aware that the new mortgage affordability rules even exist.
The survey sought the opinions of 1,540 people who have recently applied for a mortgage, are in the process of applying or are thinking of taking out a home loan.
One in five (22 per cent) of people who are in the process of applying for a mortgage are unaware that the new affordability rules exist while four out of 10 (39 per cent) who are thinking of applying for a home loan are not aware.
It is important to understand how the new rules will affect you otherwise the process becomes harder than you might expect and you may be declined a mortgage, as happened to 23 per cent of the mortgage applicants in our survey.
Understanding the rules
Although the majority of people surveyed are aware of the existence of the new rules, less than half (43 per cent) of those who applied for a mortgage and 39 per cent of those in the process of applying say they understand how the new rules may impact them. But this goes down to just 15 per cent of respondents thinking of taking out a mortgage.
Six out of 10 (59 per cent) of those in the process of or thinking of applying for a mortgage thought the new rules would slow down the application. Of those who did apply, 40 per cent said the requirement to provide additional information on income and expenditure did slow down the application but 45 per cent said it didn’t, while 15 per cent weren’t sure.
Laura Barrett, Equifax Consumer Affairs, says: “One of the main reasons for the introduction of the new affordability rules last year was to make sure borrowers could really afford their mortgage – both now and in the future, taking account of potential interest rate rises and changes in circumstance. Our research indicates that not everyone seems convinced that the new rules will prevent homeowners from overstretching themselves in the long term.”
Financially overstretching
Almost half of those who applied for a mortgage (48 per cent) or are in the process (47 per cent) think the new affordability rules will help to prevent homeowners from financially overstretching themselves in the long term. A quarter said it would have no impact and a quarter had no opinion. But 72 per cent of respondents overall are confident they will not overstretch themselves financially and this rises to 82 per cent who are currently applying for a mortgage.
Past mortgage applicants
Almost nine out of ten people who applied for a mortgage (88 per cent) were aware of the amount they could borrow and were happy with that but 12 per cent had overestimated the amount they could borrow.
Most borrowers (84 per cent) said their lender explained how they would assess the mortgage application and their ability to meet the monthly repayments.
Barrett comments: “A lender will typically look at an applicant’s credit history when determining whether they meet eligibility criteria and may also use credit information during affordability assessments.”
Concerns
With regards to the new affordability rules and the mortgage application, 69 per cent of respondents were concerned about whether they would be able to borrow the amount they needed; in the 18-25 year old age group, this rose to 88 per cent.
Overall, 40 per cent of those surveyed worried about the time it would take to complete the application. However, for those who had actually applied, 37 per cent had been concerned about the amount they could borrow, 34 per cent had worried about the time it would take to complete the application but 44 per cent were not concerned about these issues.
This might indicate that by the time people actually apply for a mortgage, many are prepared and realistic about these issues.
Assessing expenditure
Lenders will ask for details on your financial expenditure and it is worth while working out what you spend your money on before you actually go to see a lender or financial adviser.
It must be remembered that each lender has their own criteria but you should be prepared to give details on all of your financial outgoings. Most people surveyed expect to be asked about existing unsecured credit agreements, such as credit cards, hire purchase and personal loans; and existing secured credit agreements, like car loans.
Barrett suggests: “When assessing expenditure, lenders will typically want to understand how much credit an individual already has available to them. Therefore, settling outstanding debts such as personal loans or hire purchase agreements and closing any unused accounts can help to demonstrate that you have the capacity to take on a mortgage.
“Show that you’re financially responsible by keeping credit balances low and consistently making any payments due. Missed payments might be viewed as an indication that you’re already financially overstretched, or lack responsibility.”
Other outgoings
Generally, people also thought they would be asked about how much they spend on utility bills, council tax, insurance, mobile phone bills and food.
Overall, 66 per cent of respondents anticipate they will be asked about childcare costs, such as nursery fees, child-minders and nannies. However, just 41 per cent who took out a mortgage were asked for that information.
Six out of 10 (61 per cent) anticipate being asked about travel costs to work whereas 44 per cent were asked to disclose that.
Details about pension contributions were expected by 59 per cent of people and actually 46 per cent were asked.
Questions about student loans, school fees and pet costs were also lower than expected but these are more specific to certain age groups and whether you are a pet owner.
Memberships of clubs, such as a gym or golf club, were anticipated by 50 per cent of people and 45 per cent were actually asked for this.
Other costs that people said they were asked about included car running costs, number of cars owned, maintenance to former partners, dependent children, baby plans, maternity pay and intention to return to work, celebrations such as birthdays and Christmas including gifts, entertainment and holidays.
Barrett says: “There appears to be some uncertainty about the level of information needed to support a mortgage application. You should be prepared to provide information about all your financial commitments and essential expenditure. For example, lenders will often ask to look at bank and/or credit card statements.”
One respondent said they found the financial questioning “highly invasive” and another said they were asked about “everything including the kitchen sink”.
An applicant pointed out: “The lender needed proof of absolutely every single penny. In this day and age it can be difficult to provide hard copies of bills as so much is done online and some lenders don’t accept internet statements.”
You may think you are a perfect candidate for a mortgage but lenders have different criteria, and some will accept you where others won’t, as this next comment illustrates.
“Our first application dragged on over six weeks which I think was unacceptable. They asked for pieces of information in dribs and drabs whereas we told them we had everything they may need ready from the outset (we even sent spreadsheets detailing this). They were unwilling to lend us the requested amount even though we demonstrated we could afford to pay the mortgage easily (almost twice over). The application with the second company was successful, they conducted it sensibly and the process was fairly prompt (four weeks).”
Income and retirement plans
Most people expect to be asked about long-term changes to income and retirement plans as part of the mortgage application process. Only 10 per cent did not expect to be asked about this.
Two thirds of people aged between 46 and 60 thought they would be asked about changes to retirement plans and everyone over the aged 61 expected this question.
Documentation
Of those people in the process of or thinking of applying for a mortgage, 39 per cent think it will be difficult to gather all the evidence needed. However, most people who have applied for a mortgage (81 per cent) found it easy to obtain evidence of all the expenditure information needed when applying for their loan.
There was a mixed reaction to whether providing all the additional information on income and expenditure slowed down the application – 45 per cent of applicants did not think that was the case but 40 per cent felt it did and 15 per cent were unsure.
Barrett suggests: “It’s worth starting to compile things like payslips, bank statements etc, as soon as you’re ready to apply. This may alleviate some of the concerns people have regarding the time it can take to complete an application.”
Comparison with previous loan
Just over a third of applicants (37 per cent) said their application took longer to process than the last time they applied for a mortgage and the same percentage thought the checks were a lot more thorough this time.
Just 17 per cent of applicants said the process was smoother than they had expected and only 12 per cent felt the application was processed quicker this time round.
Not everyone was lucky first time round as 13 per cent said they had to approach a few more lenders to be approved for a mortgage. However, 20 per cent didn’t notice anything different compared to their previous application.
Interest rates
If interest rates were to rise, 48 per cent of all respondents said they would remortgage to a fixed rate when their current mortgage term ends and just 8 per cent would remortgage to a new variable rate, while 44 per cent indictated they wouldn’t do anything.
Although no one knows when the next Bank of England base rate rise is going to be, just under a third (32 per cent) of overall respondents plan to remortgage before rates go up, 36 per cent have no plans and 32 per cent don’t know.
Conclusion
In summary, if you are applying for a mortgage, you should find out as much information as you can regarding your financial income and outgoings and be prepared to show evidence of everything, such as bank statements.
If you have applied for a mortgage in the past – prior to 26 April 2014 – you will find the process different and possibly more intrusive. But it is designed to make sure you can afford your monthly mortgage repayments. Be realistic about what you can afford and be honest as you must prove what you are saying through documentation.
You should also check out your credit report as that shows your credit history and information such as whether you are on the electoral register – and you must be if you want a mortgage.
Make sure your credit report is accurate and up to date as that could also impact on whether you are granted a mortgage or not.
