Potential home buyers are financially stress-tested as rules force lenders to crackdown on risky mortgages
Has Help to Buy really made it any easier to get a mortgage? Lenders are now using affordability stress tests based on borrower’s monthly spending and an interest rate of 7%!
Under the new system, lenders are carrying out a thorough “forensic” investigation of a borrower’s finances. They will want to know more details about your day to day finances, including, how much you earn, how much you spend on food and utility bills every month, gym membership, mobile phone contracts and the size of your existing debts.
The new checks are based on the Mortgage Market Review outlined by the regulator, do not officially come into force until 26 April 2014. However, the new rules are already being followed by most of the country’s big lenders as part of a crackdown on risky lending.
The new affordability stress tests will be based on interest rates hitting 7% during the next five years, even though repayments may never reach this level. Potential borrowers will be refused mortgages unless they can demonstrate they will still be able to afford the repayments should interest rates rise.
|
Mortgage Type |
Average current interest rate |
Monthly repayments |
Stress test interest rate |
Increase in monthly repayments |
|
Standard variable rate |
4.36 |
£548 |
7% |
£159 |
|
2 year fixed rate |
2.45 |
£446 |
7% |
£261 |
|
5 year fixed rate |
3.36 |
£493 |
7% |
£214 |
(*Repayments for £100,000 loan)
According to the Daily Mail one borrower was even penalised for playing the national lottery every month after the bank spotted a large direct debit on his bank statements!
A couple with two pre-school children may be able to borrow less than a couple whose two children go to school, even if they have the same household income. This is because the bank will take account of the higher childcare costs the couple with pre-school children will typically face.
The rules throw up other controversial scenarios such as a childless married couple with only one earner on £60,000, would generally be able to borrow less than a similar couple with two earners on £30,000 each, because lenders estimate a higher risk of the single earner losing his or her job, than both earners simultaneously losing theirs.
David Hollingworth, from mortgage advisers London & Country, said: “It is not impossible to get a mortgage. But lenders are running the rule over people’s budgets much more closely.”
Mr Hollingworth also said that the forensic checks required by lenders have resulted in the time taken to get a loan almost doubling from two weeks before the credit crunch, to four weeks today. No doubt application fees will also be higher to reflect the extra time taken.
Since the Bank of England cut the base rate to 0.5% nearly five years ago – the lowest level 320 years, mortgages have never been cheaper. The base rate will inevitably rise and the regulator, the Financial Conduct Authority, is insisting loans must not be approved if higher repayments would push homeowners into financial difficulty.
At least the new rules should result in a reduction of risk for taxpayers, guaranteeing 15% of home loans using Help to Buy (2). However, what the new rules do not take account of is what would happen when house prices eventually fall and many struggling homeowners are unable to sell-up and repay their mortgages.
