Two-thirds of prospective home buyers are not aware of the mortgage affordability rules introduced with the Mortgage Market Review (MMR) last April, a new survey shows.
The research conducted on behalf of mortgage lender and broker Ocean Finance shows that nearly a third (31 per cent) of people planning to purchase a property in the next two years do not know that rules have been changed. Over a third (35 per cent) of potential home buyers said they were aware of the change in legislation were not really sure they understand the rules.
In April 2014, the biggest piece of mortgage regulation in a decade came into force. The changes, brought in by the Financial Conduct Authority (FCA), mean lenders must take additional steps to ensure borrowers only get a mortgage they can afford.
In practice, the new mortgage rules mean that borrowers will face increased scrutiny from lenders about their incomes and their expenditure including spending on things such as childcare, holidays and entertainment, Ocean Finance explains.
Yet 70 per cent of the surveyed 2,039 UK adults said they did not know that lenders are required to look closely at their spending. Consequently, a quarter said they had done nothing to change the amount of their outgoings to improve their chances to get a mortgage.
Of those who do know that lenders are required to examine spending, more than a fifth have reduced their spending on treats and have stopped contributing to life assurance and pensions to keep a greater proportion of their income in their bank accounts.
Budget stress tests
Under the new MMR rules, lenders would check the borrowers’ ability to make repayments in case of a challenging situation such as a base rate rise or personal life changes.
The research shows that just under a quarter (24 per cent) of potential buyers are aware that lenders would test their repayment ability if interest rates increase and only 16 per cent knew about the test to withstand changes to their personal circumstances.
Many concerned about affordability
The research shows that a third of potential homebuyers are so concerned about the tougher mortgage rules that they expect to have to delay buying a house so they can save for a bigger deposit and get into a stronger position to obtain a mortgage.
Commenting on the results, Ocean’s spokesperson, Gareth Shilton, said:
“More than a year after the new mortgage rules were introduced, potential buyers are still in a state of confusion about what they mean in reality. Even more worrying is that a large chunk of people who are gearing-up to apply for a home loan are not even aware that the mortgage rules have changed.
“As an industry, we need to do more to educate buyers and to guide them through a process which many people are finding understandably daunting.
“For anyone who plans to apply for a mortgage in the next year, it’s key that their finances are in order, including checking their credit file and gathering all their paperwork early to show as evidence. They would also be wise to cut back on non-essential spending such as takeaways and subscriptions, and to ensure that bills are paid on time so they demonstrate that they can consistently live within their means and stick to a budget.”
