New rules aimed at responsible lending and avoiding another financial crisis in the UK housing market
The key changes which came into force today, 26th April 2014, are the outcome of the FCA’s mortgage market review (MMR), mean that most people will get help from an adviser before taking out a mortgage. Borrowers should also have greater certainty about whether they can afford their mortgage both now and in the event of future interest rate rises.
Martin Wheatley, chief executive of the FCA, said: “There has been huge effort both by the regulator and the industry to get to where we are today. Since the crisis, 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.”
Mr Wheatley concluded: “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.”
The new regime will prevent a return to self-certification mortgages, as from now, lenders must always check a borrower’s income. Those looking to take out interest-only mortgages will also see immediate changes. The new rules mean that lenders will ask to see plans for repaying the full loan once the interest-only period ends, instead of relying on increased house prices as the only repayment plan.
The MMR changes come after five years of close working between the FCA, the industry and consumer groups to create and implement the new regime which comes into force today.
- The removal of the requirement on intermediaries to assess affordability.
- The removal of the non-advised sales process.
- Most interactive sales (e.g. face to face or telephone) to be advised.
- An ‘execution only’ sales process for non-interactive sales (internet and postal).
- Every seller required to hold a relevant mortgage qualification.
- It is no longer compulsory to provide customers with an Initial Disclosure Document (but firms can continue to do this if they want to). Instead, certain key messages about a firm’s service must be given to customers.
- The Key Facts Illustration doesn’t have to be given every time the firm provides the customer with information about a product that is specific to them. Instead, it is only required where a firm recommends a product or products, where the customer asks for a KFI, or where the customer has indicated what product they want in an execution-only sale.
- Lenders are fully responsible for assessing whether the customer can afford the loan, and they have to verify the customer’s income. They can still choose to use intermediaries in this process, but lenders remain responsible.
- Lenders are still allowed to grant interest-only loans, but only where there is a credible strategy for repaying the capital.
- There are transitional provisions in the MMR that allow lenders to provide a new mortgage or deal to customers with existing loans who may not meet the new MMR requirements for the loan. The borrowing is not able to exceed the amount of their current loan, unless funding is required for essential repairs. The decision on whether or not to lend in these cases remains with the lender.
Second charge mortgages: The government decided that the responsibility for regulating second charge mortgages should transfer to the FCA alongside the wider transfer of consumer credit regulation in April 2014.
Proving your income
You will need to provide evidence of your income to show how much you can afford to borrow.
If you are employed this might mean showing your payslips. If you are self-employed or a contractor, you might have to show your tax returns, accounts, business plan or projected earnings.
If the income you will use to cover your mortgage payments comes from more than one job, you will usually need to show evidence for each job.
For other types of income, like shares, bonuses or a pension, you may have to provide documents proving how much you receive.
You will have to tell your lender if you expect:
- your income to go down
- your outgoings to go up
The evidence you will need for each type of income will vary between lenders. Whatever they need from you, they must be sure that your income will cover your mortgage as well as your regular basic spending and other commitments.
Confirming your spending
An adviser or lender will also need to know what you need to spend to keep up a basic standard of living. They can then work out how much of your income you can afford to spend on your mortgage.
They will look at your spending in three categories:
This is what you regularly spend on the things you cannot do without, such as:
- household cleaning and laundry
- gas, electricity and other heating costs
- water bills
- essential travel (such as travel to work or school)
- council tax
- buildings insurance (it is usually a condition of your mortgage that the building must be insured)
- ground rent and service charges (for leasehold properties)
Basic quality of living costs
This is what you need to spend on occasional essentials, with some allowance for leisure costs, including:
- household goods (such as furniture and appliances) and repairs
- personal goods such as toiletries
- basic leisure costs, including non-essential transport
- TV licence
Repayments and other commitments
This covers other payments you know you will have to make, including:
- debts you are paying off, like credit card bills, loans or hire purchase payments
- child maintenance and alimony payments
The exact details you are asked for will vary between lenders, but you should expect to discuss your regular spending in all these areas.
If you want an interest-only mortgage, the lender will also ask you to explain and show proof of your plan for repaying the full loan when the interest-only period ends.
The lender will check that your plan is still in place at least once during the interest-only period.
Checking future affordability
Your mortgage lender will look at how interest rates are predicted to change over a minimum of the next five years, to see how they might affect your mortgage payments.
If your payments are likely to go up, they will check that you could still afford them if your other outgoings and your income stayed the same.
It is possible that rates could go up by more than predicted. If this happens, your payments could be higher than predicted too.
Paying your mortgage after you retire
If your mortgage is due to last until after you retire, your lender will check you will be able to afford your payments with the income you expect to have then.
The information they need about this will depend on the lender and how long it is until you expect to retire.
Changing an existing mortgage
If you already have a mortgage and want to remortgage, a lender may be able to arrange this without doing all the affordability checks.
The lender will still have to do the checks if you are:
- increasing the amount you are borrowing
- making a change that might affect what you can afford (for example, extending a mortgage into your retirement, or removing someone from the mortgage contract)
These changes are expected to make mortgage application interviews last between 1.5 to 3 hours, with complex applications taking even longer