Applying for a mortgage – be prepared

The new rules, known as the Mortgage Market Review (MMR), were brought in by the regulatory body, the Financial Conduct Authority (FCA), in order to protect borrowers from taking on mortgages they cannot afford to repay.

Introduced from April 26, 2014, the MMR revolves around affordability. Can you afford monthly mortgage repayments, not only now, but in the future too? If interest rates go up and your repayment rises, will you still be in a position to be able to pay your lender?

It is the responsibility of the lender to ensure borrowers can afford the mortgage. The FCA will be making sure that lenders adhere to the new rules, otherwise lenders could be heavily penalised.

Before these new rules came in, lenders looked at affordability anyway – they just have to ask a few more questions now, so the mortgage application process is likely to take longer – perhaps two or even three hours. But if you go prepared it will take less time.

Colin Fyfe, chief executive of Darlington Building Society, said: “From our perspective we welcome the introduction of MMR. The new rules endorse in many ways the approach to sensible mortgage lending the society has always taken. Lenders have a clear duty to ensure mortgages are affordable by borrowers so our practices have changed little.”

He explained: “We assess whether the proposed mortgage is affordable in a sensible way and we do not ask embarrassing questions about personal expenditure although we do have a duty to carry out a detailed affordability assessment, as would be expected.

“Mortgage interviews on average are taking between one and a half and two hours to complete which, bearing in mind the importance of the transaction we do not feel to be unreasonable. My message to anyone looking for a mortgage at present is not to take too much notice of some of the negative headlines relating to MMR.”

Lenders’ criteria
Different lenders will have different criteria but the following information will give you an understanding of what you will need to show your lender.

It’s a good idea to be prepared when you apply for a mortgage. Make sure you have to hand your last three wage slips, P60, three months of bank statements and knowledge of what your monthly outgoings are – go through your bank statements and make a note of them.

Lenders will want to know how much you spend each month on the following:

• Residential mortgages
• Buy-to-let mortgages
• Bank loans
• Student loan
• Credit/store cards
• Hire purchase agreements
• Regular housekeeping expenditure
• Grocery shopping
• Utilities – gas, electricity, water
• Council tax
• Travel costs to work
• Childcare costs
• Phone and broadband
• Television subscriptions
• Car costs
• Insurance
• Investments
• Maintenance/Child Support Agency payments
• Any other regular monthly expenditure e.g. gym membership

Your mortgage lender will also ask if you are aware of any future changes to your finances which may impact on your ability to repay the mortgage, for example, looming redundancy. They will also want to know about your pension arrangements if your mortgage term goes into retirement age. And they may want to know where you got the deposit for the house from; Nationwide, for example, requires proof of the origin of the deposit when it is more than £20,000.

Identity verification
You will need to show evidence of address and identity. For identity, a valid passport or driving license or recent evidence of entitlement to state benefit, such as housing benefit, tax credit or pension. Plus, another document proving your address, like a council tax statement, current bank statements or credit/debit card statements and utility bills. It is worth noting that statements printed from the internet are not always acceptable.

If you have lived at your current address for less than three years, lenders will want your previous address or addresses too.

Credit history
Lenders will also ask about your credit history. Have you ever had a County Court Judgement or any other Court Order for non-payment of a debt, have you ever been in arrears for a mortgage, rent, loan or credit store card, had a property repossessed, been refused a mortgage or credit, been declared bankrupt or insolvent?

Confusion
According to a recent survey commissioned by Experian, the global information services company and credit reference agency, almost three quarters (72 per cent) of aspiring homebuyers in the UK do not know about MMR. Among the 28 per cent that claim to know what it is, many are confused or ill-informed as to what these new affordability measures mean.

Experian’s research found that 43 per cent of people incorrectly think the introduction of the MMR means they can apply for a mortgage with smaller deposits.

One in five (19 per cent) believe lenders will relax their lending criteria, when in fact affordability checks will become much more stringent.

It is advisable to get your finances in the best possible shape before applying for a mortgage. The research found that 19 per cent of potential housebuyers don’t plan on preparing their finances before their mortgage application, while 18 per cent only plan on preparing a month prior to their application.

Jonathan Westley, managing director of Experian Consumer Information Services for UK and Ireland, advises people to make a clear six-month budget, try to clear any outstanding debts and cut back on luxuries in the lead up to application.

He commented: “The key thing to remember is that the MMR aims to protect people from debt. The MMR will not change who will be lent to, but rather prescribe a more robust and granular approach to assessing a person’s actual or reasonably anticipated income and level of affordability. This is both at application stage and at key points within the life of a mortgage, such as a change in repayment terms or extending the term beyond expected retirement.

“For individuals applying for a mortgage, it is important that they think about what they can afford to borrow and repay, including if circumstances change.”

Andrew Webb, head of Equifax Personal Solutions, another credit reference agency, agreed: “With new affordability rules now in place, it’s important that homeowners plan ahead for when they are looking to change their mortgage. Their credit information, along with their spending behaviour on an assortment of other outgoings, will be scrutinised much more closely by lenders than it has in the past.”

“Homeowners may well find it useful to look at their credit report six months or so ahead of making applications for a new mortgage, to gain an overview of their financial commitments and enable them to prioritise some payments and make savings on outgoings.”

Sensible
It must be remembered that the new rules are there to help you understand whether you can afford a mortgage.

Paul Broadhead, head of mortgage policy at the Building Societies Association, said that while some people may not be able to borrow as much as they expect, he emphasised that it does not mean those on lower incomes or with smaller deposits will be frozen out of the property market. In fact, due to these changes, some people may actually be able to borrow more than before, if their expenditure is lower than the average.

He commented: “It is understandable that people are concerned about the changes to the mortgage application process, however, it is vital that this new regime does not dent consumer confidence or sentiment in the housing market.

“A number of building societies implemented the process early and have been lending this way, without problems, for a number of weeks, in fact, the common sense approach has been taken for years.

“We do not believe that the majority of borrowers will have an issue, despite the horror stories that may appear in the coming weeks. It is highly unlikely that a single purchase or category of expenditure will make the difference between yes or no decisions, but if anyone is concerned, we would urge them to talk to their local building society for information, advice and support.”

The regulator’s view
Martin Wheatley, chief executive of the FCA, noted: “There has been huge effort both by the regulator and the industry to get to where we are today. Since the crisis [which started in 2008], lenders have been taking a far more sensible approach to mortgage lending, and the MMR is designed to ensure that this common-sense approach continues. We do not want to see mortgage lending return to the practices of the past where people were taking out mortgages they simply couldn’t afford.

“While for some borrowers the questions being asked may seem more detailed, they should feel confident that practices which led to hardship and anxiety for consumers in the past will not be repeated.”