New rules, which will be introduced by the Financial Conduct Authority (FCA) on April 26, aim to ensure that borrowers cannot take out loans they cannot afford.
Lenders will therefore have to put a person’s ability to repay under greater scrutiny, requiring them to prove that they can afford the repayments both now and in the future. Shaun Church, Associate Director at mortgage broker Private Finance, comments: “When applying for a mortgage we are now seeing banks placing far greater emphasis on a borrower’s income and outgoings when arriving at a decision to lend.”
Cheap funding will also be withdrawn for banks and building societies as part of the changes, while fears of a housing bubble could lead to lenders toughening their criteria even more and saving home loans for borrowers considered as low-risk.
“In the past too many people got a mortgage by simply telling their lender they would have no problem repaying their debt, and that was that,” commented the FCA’s chief executive Martin Wheatley. “Getting a mortgage can be one of the biggest financial decisions people will ever make, so it needs careful consideration. Our new rules will hard-wire common sense into mortgage lending, and the guide we have created will help explain those changes to borrowers.”
Affordability checks will now be carried out when people apply for a loan in a bid to prevent a recurrence of the irresponsible lending practices of years gone by.
“Clients are required to provide significantly more paperwork in support of an application”, says Church, “And these documents are being closely scrutinised to ensure the bank are making a sound lending decision in line with the new regulations”.
Monthly payments and household expenditure will be taken into consideration during the application process and will need to be validated before a mortgage is granted. “This includes pension contributions, childcare, household utilities, as well as any loans and credit cards that will continue after the mortgage has completed. This has led to some clients being able to borrow less than they had initially anticipated”, says Church.
“The majority of lenders have already implemented the changes and there are reports of customers experiencing significant backlogs when applying for a mortgage ‘in branch’ as the staff get up to speed with new processes. This slowdown is in direct contrast with the buoyant market we have been seeing and further delays are likely over the next few months as these new rules bed in”.
The FCA guide explaining the changes will be handed out to prospective borrowers in branches of high street lenders, mortgage advisers and estate agents nationwide.