Mortgages applicants should be prepared to lay bare their financial circumstances in line with new lending rules, which were issued by the Financial Conduct Authority earlier this year. The changes call for applicants to disclose detailed household budgets and to outline any future plans that could make repaying a home loan more difficult, such as starting or growing your family or setting up your dream business.
As well as forcing lenders to closely scrutinise applicants’ spending habits, these tougher mortgage regulations have pulled the plug on self-certification and put strict conditions on interest-only mortgages. As outlined by the Money Advice Service, the new rules do not cover buy-to-let or second mortgages.
Mortgage lending: a new landscape
Today’s first-time buyers and re-mortgagees face a rigorous examination of their financial health when they visit their bank or building society. Prepare to spend two hours or more with your lender. You’ll be expected to prove your ability to cover repayments now and in the long term. Applicants will need to be better prepared than ever for these appointments. Paperwork is essential, so gather together six months of payslips, or three years of bank statements if you are self-employed.
Bringing evidence of your income to the meeting is essential, as is bringing along a copy of the household budget you use to track fixed essential expenditure and manage all other costs. Expect to disclose your monthly utilities spend, grocery bill, childcare commitments, credit card repayments and leisure costs. Lenders’ questions will come thick and fast. Are you planning to start a family? Any career changes on the cards? Does your budget show how you could pay if interest rates shoot up? In this new mortgage era, lenders will stress-test the affordability of the home loan amount against a higher-interest scenario. Even if your current circumstances demonstrate you have the disposable cash to cover repayments, the lender will now check you can still do so at much higher rates. The Money Advice Service’s online mortgage calculator can help you prepare for this section of your mortgage meeting.
Interest-free and self-cert changes
Business owners and sole-traders can no longer vouch for their own financial well-being via the ‘self-cert’ process. The FCA has banned self-certification mortgages under the new rules, making lenders responsible for checking how much money your business makes. Interest-only mortgage applications will be rejected unless a lender approves of your plan for repaying the loan when the interest-only period ends. The new rules make it a lender’s responsibility to assess how well a customer can cope with repaying their mortgage in the long term. All in the name of safer and sustainable lending. As George Osborne, Chancellor of the Exchequer, commented: “Changes to the mortgage market will help stop irresponsible lending. Part of the plan to build a resilient economy and avoid mistakes of past.”
Expert advice as standard
The FCA’s shake-up of mortgage services stipulates that most mortgages can only be offered ‘with advice’. Mortgages offered as self-service or non-advised are a thing of the past and must now be discussed with an expert advisor through a bank, via a broker or mortgage phone line. Only mortgage professionals and high net worth borrowers are exempt from this change. Don’t expect to get an immediate interview, as banks and build societies are reportedly having to recruit enough qualified advisers to meet the demand, particularly in and around London.