On 26 April 2014 the new mortgage affordability criteria instigated by the Mortgage Market Review (MMR) came into force. This criteria was intended to prevent some of the problems caused by subprime mortgage lending before the 2008 financial crash, and changed the way that mortgage offers are calculated. At the same time the MMR rules improved the quality of financial advice available to mortgage customers, making it mandatory for all lenders to employ professionally qualified mortgage advisors.
Please note that the changes discussed below apply to residential mortgages only, and do not affect Buy to Let mortgages.
1. More Qualified Mortgage Advisors
One of the most obvious ways that the new mortgage lending criteria have changed the application process is by requiring lenders to provide advice to borrowers. In the past, customers could obtain a mortgage product without receiving detailed financial advice as to which mortgage product was best for them (called the ‘non-advised’ sale process). From April 2014, banks, building societies, mortgage brokers, financial advisors and other lenders have to provide financial advice to the borrower to make sure that the product that is sold is suitable for their individual circumstances. Only mortgages arranged by post or over the Internet will be permitted to be sold without financial advice (the ‘execution-only’ process).
These MMR rules mean that all staff selling mortgages now have to be professionally qualified, with mortgage advisors required to achieve a Level 3 certificate from the Qualifications & Credit Framework. These staff will also become part of the FCA approved persons regime. Banks and other mortgage lenders will have until 2016 to comply with the new rules and in the mean time mortgage brokers and financial advisors will attract more business in areas where there is a shortage of qualified local staff.
2. No More Self-Certification
Another change brought about by the MMR has been more in-depth checks on a mortgage applicant’s income, to verify that the information provided on a mortgage application is correct. It is no longer possible for customers to self-certify their earnings, and self-employed customers will have to provide tax records to show what they have earned in recent years. The level of detail required is set by the individual lender, but all mortgage decisions must now be based on accurate and detailed information so that the lender can accurately assess their lending risk.
3. Greater Scrutiny of Expenditure
At the same time as providing greater information about their income, mortgage applicants will now have to give lenders detailed information on their expenditure and credit history (for example the last 3 months’ bank statements along with a credit reference check). This part of the application process will look particularly at long-standing financial commitments, such as debt repayments, childcare costs, gym subscriptions and other personal spending habits. Borrowers are likely to have to account for their recent spending in a lengthy meeting with their lender or mortgage broker as part of the assessment process, which means it may take longer to receive a mortgage offer.
4. Less Emphasis on Income Multiples
The assessment of personal expenditure and credit history replaces in part the old system of calculating mortgage offers based on income multiples. While income multiples have not been entirely abandoned, the MMR rules mean that mortgage offers are based a fuller picture of the borrower’s financial situation. Those applicants who live frugally with few financial commitments will benefit from this new form of assessment and are likely to find that mortgage lenders are willing to lend them larger sums of money because they are seen as a low risk. On the other hand, those applicants with greater outgoings may find that they are offered a lower sum than they have would have been offered under the old rules, or even find that they are refused credit.
This scrutiny of expenditure is most likely to negatively affect young families with childcare expenses and those with high levels of personal debt, which combined with rising house prices may mean that they are unable to access the market until their circumstances change. Because these rules will also apply to those who seek to remortgage their property, current borrowers who re-apply for a mortgage may find themselves in difficulties if their financial situation means that they are no longer seen as a good risk.
5. A Stress Test for Interest Rate Rises
With the possibility of rising interest rates in coming years, mortgage lenders are now required to apply a ‘stress test’ to assess whether applicants could afford to keep up repayments during a period of sustained interest rate rises. It is thought rates applied to applicants with larger deposits could be around 5%, with ‘stress tests’ for Help to Buy Mortgage applications at rates of as much as 7%. Depending on the outcome of the tests, the lenders’ assessment may result in a lower mortgage offer. This is intended to avoid mortgage defaults and the financial hardships that have occurred in recent years when customers have borrowed beyond their means.
6. A Longer Mortgage Application Process
With more detailed information required for a mortgage application, the requirement for qualified mortgage advisors and the addition of lengthy assessment meetings (estimated at up to 3 and a half hours), the mortgage application process now takes longer. There may be a shortage of qualified advisors in certain areas, which may cause further delays in the process.
In the first six months following the implementation of the MMR there was a steep decline in the number of mortgage approvals. According to figures from the Nationwide released in November 2014, approvals were down 20% in September when compared to the start of the year.
7. Greater Protection for Vulnerable Borrowers
In the past there has been little advice or protection for customers who were seeking to release equity from their home through re-mortgaging or who were forced into selling their home. Now these customers are classified as ‘vulnerable’ borrowers who must receive proper financial advice from a qualified professional before they are sold a mortgage product.
In addition, those customers who are applying for an interest-only mortgage will have to provide a credible repayment strategy as part of their mortgage application, and lenders will look very closely at this when assessing their eligibility. Just as for other types of residential mortgages, interest-only mortgage lenders will have to provide advice on the best mortgage deal for the individual financial circumstances of the customer.