When you start to see the headline “Mortgage Drought” appearing in the weekend press once more it is enough to make anyone in the property market shiver. This time, the reference is to the upcoming Mortgage Market Review, which officially comes in to play on April 26th, but some lenders will actually put into force earlier.
The main issue is that with the forensic level of detail lenders will now be looking at affordability, together with tougher stress testing, is the worry that this will cause “a third of borrowers who would be approved for a mortgage today could be rejected by lenders”, as suggested by the boss of Ipswich Building Society in a recent article.
This of course would have serious implications for the housing recovery.
Alternatively, could all the speculation and dramatization actually mean that MMR will be the mortgage equivalent of the Millennium Bug? As an industry we have been down this road before and the reality has never been as bad as the initial fear – we are actually very good at adapting.
Having worked closely with a number of lenders on this, I would not go as far as saying a drought is on the cards, but it will come as a shock for some people, particularly those who have had a mortgage approved in principle now, but do not find a property before the April 26th date and have to re-apply.
The issue is that public education of this and the changes that it will cause has been pretty poor so far, perhaps mainly because lenders have, as usual, been slow to release their plans.
Looking at the details of the MMR itself, you could actually say that for most borrowers there will not really be much of a change from where the market is now as lenders have self-corrected over the past few years.
In essence, there is no actual ban on interest only mortgages, (just a requirement to have a method of repayment in place), no restrictions on age or set guidelines for the self-employed. In fact, the long and the short of it is that borrowers need to prove that they can afford the loan, evidence their income in a manner acceptable to the lender and show that they can actually pay it back. Sounds reasonable!
The key is around advice. Let’s face it, it was always crazy that a First Time Buyer could walk into a bank branch and come out with the biggest loan they are ever going to take out without getting any advice. So now, any mortgage transaction where human interaction is involved, face-to-face or on the telephone, must be advised.
The challenge however, will be in how each lender chooses to interpret these guidelines; positively or hiding behind them.
In essence, there are a few key points to be aware of for anyone buying a home with a mortgage over the coming months.
1. Documentation & Affordability– this is always key, but with lenders now being responsible for affordability this means they will check more documents. So, 3 to 6 months bank statements will be looked at, pay slips in all cases and budget planners extended and scrutinised. Preparing early is key.
Early budget planners we have seen show a level of detail designed to get to the heart of a borrowers spending habits. Identifying gambling, past loans, regularity of restaurant visits, expensive hobbies, child care, pet costs, even washing and dry cleaning. One form breaks household budgets into seven categories, within which there are several further categories which require itemising.
For example, the section on car travel is broken down into eight further parts, with categories ranging from insurance and fuel to tax and even parking costs. These answers will be checked alongside bank statements.
The question then becomes which lenders will take which costs into account when determining the amount they will lend?
Borrowers need to start early, say 6 months before they want to apply for a loan and managing their budget accordingly, cutting out any wasteful spending or expensive habits to present the best possible picture.
2. Stress tests – Although many lenders run this now, lenders officially now have to calculate affordability on a repayment basis not only on the current interest rate, but on a future assumed higher rate. This will undoubtedly cause some on the edge applicants to fail affordability scores whereas now they may scrape through.
There have been discussions around suggested interest rates for assessing long term affordability being set at 3.5% above a lenders Standard Variable Rate. Actually, it was the FCA themselves who gave the “example” of “lenders’ SVR plus the forward sterling rate a suggested measure.” Currently the forward sterling rate is over 3.5 per cent.
As one lender noted, given this is the only example the FCA gave, that is the one they will use!
For those lenders with a high SVR already this would present an insurmountable challenge for some, actually who am I kidding, more than some!
As a result of this there is an expectation of higher decline rates and more loans restricted to a certain amount.
Some lenders claim they have been running this in the background for a while however and that there will be no real difference, with at least one claiming the difference would only affect 2.75% of their borrowers.
As ever, the proof will undoubtedly be in the proverbial pudding.
3. New systems – as with any changes like this new systems will come in to play for many lenders and moving from an income multiple calculation to a credit scored affordability system will cause challenges for lenders.
Whenever a new system is mooted amongst lenders, especially the larger ones, one thing is certain; it rarely works first time. Whilst IT firms are licking their lips, the rest of us know that blips, issues and slowdowns are on their way to make even the most mild-mannered mortgage broker throw our laptop out of a closed window in frustration.
Although again, the good news is some lenders are more advanced than others in this and should not see too many tweaks, heads and brick walls will no doubt be needed in abundance!
4. Speed – All of this will undoubtedly cause issues and bottlenecks as lenders get to grips with this. Of course some lenders will be more ready than others but I suspect delays to occur more regularly.
Apart from the more advanced technology wise lenders, this new regime will require more checks and therefore more staff to do these checks, which all means more time and cost.
Brokers and borrowers alike will also need time to adapt to the new documentary requirements and Estate Agents will need to be aware that things may not move as quickly as they have up till now.
The good news here is that many decent brokers already work in this fashion so will be well versed and ready to adapt much quicker than those direct branch staff.
5. Approaching a lender directly – Perhaps the biggest change is the fact that anyone going direct to a bank will have to do so on an advised basis which is quite right! This means remortgaging, changing the terms of your loan, borrowing additional finance will all have to go through the elongated process that lenders just have not been used to doing.
With lenders already short of staff and struggling to train everyone up in time, going direct to a lender will undoubtedly slow down the proceedings even further. In fact, for most I would go so far as saying it will be a pointless, painful exercise, especially in the first few months of the new regime.
Things will settle of course, but this is without doubt the year of the intermediary and lenders will look to us for help and assistance.
Although there is some concern, it is important not to over-dramatise the inception of this new regime.
Of course many will be affected and there will be frustrations all round, but with careful preparation and sensible advice some of the issues can be overcome. There will be borrowers who need to scale back their ambitions, but then again, I guess that is the whole point to ensure affordability.
It will not be easy to answer the first question and prospective buyer asks when first approaching us, “How much can I borrow?” This will now depend on a myriad of factors rather than a multiplication of basic salary and borrowers would be best to book in an early meeting bringing with them their last 3 months bank statements and pay slips as a minimum as soon as possible.
With the new regime about to hit, never before has the importance of having a good independent advisor been so pronounced. Being up to date with lenders approaches to MMR, their small print and criteria, their systems and timescales as well as affordability calculators will make all the difference.
Estate Agents and Solicitors need to take note also, as changes that now materially affect the loan could cause a rescore under MMR requirements and cause serious issues.
We will all get there and the bumps in the road will flatten, but it is going to be an interesting couple of months.
Educating the public and leading expectations will be key.