The summer season brings with it new changes in the mortgage world. Lenders have changed the way they view mortgage lending and the income they take into account when calculating affordability. From the end of April new regulations, undertaken by the Financial Conduct Authority (FCA), were introduced following a Mortgage Market Review (MMR).
This latest review was implemented due to concerns that historically applicants had been allowed to take out a mortgage that they perhaps couldn’t comfortably afford. There are many reasons why this may be the case, the most common being that lenders hadn’t taken into account the lifestyles of individual applicants.
Outgoings such as loan and credit card repayments have always been taken into account. However, this latest review now includes other items in its basic “quality of living” costs. These include personal grooming, gym membership, and an allowance for individual leisure pursuits.
Whist it is sensible to consider these costs there are concerns that lenders will be using national average calculators for expenses such as electricity, gas, and food costs. However, what a typical individual spends on food in one location is likely to differ to someone elsewhere.
Not all applicants are average, quite the opposite in fact. Every individual is unique. As such, to apply a national average when calculating borrowing capacity can not only be frustrating it could dramatically alter what the lender will consider to be an applicant’s borrowing capacity and this may not correctly reflect what they really can afford.
Another factor that lenders will be assessing is the size of the applicant’s mortgage repayments if the interest rate increases. Many suggest this could escalate to as high as 7 percent. Rates are now at their lowest levels. If an applicant has only budgeted for the current rate of interest and this increases in future months, it could be an understatement to say they will get a payment shock. The new assessment measures are designed to avoid similar scenarios and ensure the applicants can still enjoy their current standard of living.
Consumer protection is at the forefront of these new changes. The next few months will undoubtedly see a longer application process while potential borrowers, advisers, and lenders adjust to these new rules. Let us also hope their implementation have the desired effect and don’t prevent credit-worthy applications being adversely rejected or future borrowers stopped in their tracks.