New mortgage rules set to come into force in April will require lenders to more closely assess whether a borrower can afford their large mortgage applications. However, it has emerged that many mainstream lenders have already implemented more rigorous checks which are likely to see more people refused for the home loan they need.
One of the key changes is that lenders are ‘stress testing’ borrowers against interest rate rises. This means that unless you can demonstrate that you can afford your large mortgage when interest rates rise, you may have your application refused.
Could you afford your large mortgage if rates hit 7 per cent?
The Daily Mail reports that ‘under a major crackdown, lenders must ‘stress test’ large mortgage applications to see if they will be able to afford potentially higher monthly costs.’
As well as checking affordability more closely than ever, potential homeowners must also be able to prove that they will still be able to afford their high value mortgage even if the cost of their repayments never rises as high as their lender predicts.
The rules set by the FCA say a lender must assess a mortgage’s affordability over the five years after the loan is made. At present, the market expects the Bank base rate will be 3 per cent in five years but lenders are using rates of up to 7 per cent to gauge affordability.
The new guidelines, following the Mortgage Market Review undertaken by the City regulator, officially come into force on April 26. However, the newspaper reports that they are already being followed by most of the country’s big lenders.
Islay Robinson, CEO of London mortgage advisor and high net worth mortgage experts Enness Private Clients, said: “While many borrowers can afford the repayments on their large mortgage while the Base rate is at 0.5 per cent, the point of these rule changes is that borrowers should still be able to meet their repayments when interest rates inevitably rise.”
Changes to affordability checks also set to cause applicants some problems
As well as ‘stress testing’ borrowers against future interest rate rises, changes to affordability checks are also intensifying ahead of the April rule change. Under the new system, lenders will take a closer interest in your household expenditure, considering everything from your grocery shopping and childcare costs to your loan repayments.
The Mail reports that one borrower was even penalised for playing the National Lottery every month after the bank spotted a large direct debit on his bank statements.
Mr Robinson, the large mortgage expert, added: “The changes to affordability assessments are going to throw up some inconsistencies. If you have pre-school children then you will probably be approved for a lower mortgage then a couple with school age children because of the cost of childcare.
“And, a household with one major wage earner is likely to be offered a lower mortgage then two lower earners because of the increased risk of all your income disappearing if the breadwinner loses their job.”
Seek professional help if you need your mortgage approved quickly
A knock-on effect of the rule changes is that lenders are also taking much longer to process mortgage applications. Mr Robinson believes that this is a situation which will continue for several months.
“Anecdotal evidence suggests that it is taking lenders up to four weeks to approve a mortgage at present which could be a problem if you’re in a race to secure your dream home. In this situation it can pay to speak to a mortgage broker who may have contacts who can rush through your application and secure the funds in the timescale you need,” he added.