New mortgage rules: the questions you will be asked
12:40PM BST 25 Apr 2014
Planning to buy a home or change or move your existing mortgage? If so, brace yourself for a long wait to see a mortgage adviser, three-hour interviews at the bank and forensic analysis of your daily spending habits thanks to new lending rules that come into force tomorrow.
Even after jumping through all those hoops, success is not guaranteed experts have warned thousands of buyers and home owners are likely to be rejected because they do not meet the new requirements.
The City regulator, the Financial Conduct Authority (FCA), has introduced the new rules, known as the Mortgage Market Review, to ensure borrowers are issued with mortgages they can afford both now and in the future. The FCA was concerned that lenders were making it too easy to get a mortgage before the financial crisis. Many households borrowed too much money and found they were unable to keep up their repayments when the financial crisis struck.
So-called self-cert loans, where borrowers declared their income but did not have to prove or certify it, were common and people routinely exaggerated earnings to borrow more. Interest-only loans also caused problems. Borrowers flocked to these deals because their monthly repayments were lower, but they had no way to repay the capital at the end of the loan.
To ensure safer lending in future, mortgage providers are now responsible for assessing whether customers can afford the loan in the long term. This includes buyers and those who are remortgaging and want to increase the size of the loan, vary the time frame or transfer it to a new property.
As part of this, the vast majority of borrowers must take formal advice, either from the lender, a mortgage broker or a financial adviser.
The adviser will assess a borrower s financial situation, determine whether they can afford a loan and help decide which mortgage is best.
Banks and building societies are understaffed because advisers must have specialist qualifications. Most lenders used unqualified sales staff to sell mortgages to customers previously and are still in the process of recruiting or training qualified advisers.
Already there are long delays for appointments in some areas of the UK, particularly London and the South East where the property market is booming. Brokers and financial advisers are seeing an increase in inquiries as a result, adding to their own wait times.
Some borrowers who already know exactly which mortgage they want may be able to apply directly online or by post without taking advice; however, they must be able to provide full details of the deal without any input from an adviser. In addition high net worth borrowers , with an annual income of more than £300,000 or assets worth more than £3m, will be able to take out a loan without advice.
The 27 questions you may be asked
How much do you spend on:
-TV and Internet subscriptions
-Essential and non-essential travel
-Clothing and footwear
Do you have children?
Are you planning to start a family or have more children?
Do you have any plans to leave your job, start a business or become self-employed?
Do you expect your income to fall over the next few years?
Have you ever taken out a payday loan?
Do you ever gamble?
There are already reports that those who do need advice and secure an appointment with their lender are being grilled for up to three hours about their income and spending habits.
Santander and Nationwide said the interviews would take up to two and a half hours on average. NatWest, Lloyds Bank, Halifax and Yorkshire Building Society said they would take around two hours and HSBC said 90 minutes. More complex applications may take even longer.
Applicants will need to supply detailed proof of earnings such as wage slips and bank statements going back at least three months, but more likely six months. Self-employed and contract workers face some of the toughest questions they are being asked for earnings track records going back up to three years and evidence that they will have work in the future, such as a formal offer or contract extension.
In addition, lenders have developed intrusive affordability questionnaires that go far beyond monthly bills and essential living expenses.
Many lenders now want to know whether a borrower gambles, has taken a payday loan in the past, regularly visits restaurants or has pets or expensive hobbies.
Some are drilling down to the finest details of people s outgoings, asking how much they spend on personal grooming, haircuts, cleaning products, parking and eye care. Some may even want to know about costs that could arise in the future following major life changes such as starting a family or becoming self-employed.
Aaron Strutt, of mortgage broker Trinity Financial, said lenders had now completely ditched the old measure of affordability income multiples for lending decisions. Where lenders used to advance five or six times a borrower s annual income, they now use affordability calculators that take account of all spending, he said. The checks being applied are much more thorough.
On top of all this lenders will apply more rigorous stress tests to ensure borrowers will still be able to afford their repayments when interest rates rise.
Lenders will have to consider the effect of likely future interest rates on affordability over a minimum period of five years, and justify the method used to forecast rates.
Many lenders are being cautious with their forecasts and assuming mortgage rates will have reached between 6pc and 7pc in five years time. This will require borrowers to have a considerable cushion in their disposable income to show they will be able to meet their repayments in the future.