New rules came into force in April 2014 which mean mortgage lenders do more checks on someone before they give them a mortgage. The rules were a result of something called the ‘mortgage market review’ and they brought in several changes.
Tougher questions, more scrutiny
Since April 26th 2014, mortgage lenders have asked more questions and carried out more checks before working out whether or not you qualify for a mortgage.
The rules mortgage lenders have to abide by mean:
1. A mortgage lender must check you can afford the loan. It’s their responsibility, rather than that of the mortgage broker or anyone else to check that you can afford the mortgage.
2. You will have to be able to show that you earn the income you say you do. If you’re employed, you’d be expected to provide wage slips and if you’re self employed you’d have to provide an SA302 (it’s a certificate to show how much income you earned and how much tax you paid). You’ll also be asked for copies of your accounts. Currently it’s hard to get a mortgage if you’re self employed if you have less than two years’ accounts (and lenders prefer three years of up-to-date accounts).
SAVVY TIP: Self certification mortgages, where the prospective borrower verifies how much they earn, won’t make a return to the market. These were popular before the credit crisis but haven’t been available since 2008.
3. Mortgage lenders must ‘stress test’ your ability to pay your mortgage. That means a mortgage lender must check that you’ll be able to afford the mortgage if interest rates were to rise in the future (they should assume that interest rates may rise by 3% in the next five years). They will also take into account possible changes to your own circumstances and how well you could cope with those.
4. You can only take out an interest-only mortgage if you can show you will be able to repay it. Interest-only mortgages are only allowed where there’s a ‘credible repayment strategy’. Some mortgage lenders have stopped offering interest-only mortgages entirely while others will still offer them, but the loan-to-value limit tends to be much lower than with a standard repayment mortgage.
From 26th April 2014, if you take out a mortgage face-to-face or over the phone, you’ll have to be given advice, although it doesn’t have to be independent advice. This is a really good rule for several reasons.
1. You will know when you are getting advice. If you take out a mortgage, whether it’s with a bank or building society or through a mortgage broker, you’ll have to be given advice.
2. You’ll have access to a complaints process if the mortgage isn’t right for you. You’ll be able to make a claim against the broker or lender’s adviser if it turns out that you’ve been mis-sold a mortgage.
SAVVY TIP: If you earn more than £300,000 a year, work in the mortgage industry or are borrowing for business, you can opt out of being given advice.
Help for trapped borrowers on interest-only mortgages
If you have a mortgage with your existing lender but don’t qualify for a mortgage deal or can’t remortgage to another lender — perhaps because you’re in negative equity, are on an interest-only mortgage or have gone self employed — there are transitional arrangements in place.
- Customers will be protected. Mortgage lenders will not be able to take advantage of a customer’s situation by moving them onto mortgages that are more expensive than those offered to other customers. So, it doesn’t mean you’d necessarily have to be offered a competitive mortgage deal, but you should be able to stay on the lender’s standard variable rate, at the very least.
- Lenders may be more flexible if you don’t want to borrow more. David Hollingworth of London and Country mortgage brokers says this could be helpful to borrowers in some circumstances. “If you don’t want to borrow more but you want to take out a fixed rate mortgage, which might be done for sensible budgeting reasons, you might have struggled if you didn’t meet your mortgage lender’s new, tougher lending criteria.”
Mortgages and retirement
It’s estimated that as many as 10% of people aged 65-74 have a mortgage. The FCA says that it wants lenders to take into account possible changes in a borrower’s income in the future. If your mortgage term is due to last beyond retirement, it could mean:
- If you’re some way off retirement: the lender would ask you what pension plans you have in place.
- If you’re only a few years away from retirement: the lender may ask for documents showing how much your annual income is expected to be from your private and state pensions.
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