25 Apr 2014

Want a mortgage? You’ll have to pass a tougher test first

Mortgage applicants face tougher checks as lenders delve more deeply into people’s personal lives, from their plans for parenthood to how they will spend their old age.

The industry-wide changes, introduced by the Financial Conduct Authority (FCA), affect home buyers and people looking to re-mortgage and they will mean that lenders have to take a much stronger interest in people’s spending habits and how their life plans could affect their ability to meet their repayments.

Mortgage applicants will need to sit through longer interviews, provide more paperwork to back up what they are saying and could find themselves taken aback by the probing nature of some of the questions they will be asked.

The Mortgage Market Review (MMR) rules aim to ensure there is no return to any irresponsible lending practices of the past.

But some concerns have been raised that it could slow down the housing market, which has been springing back into life over the last year, as the industry adjusts.

Childcare costs

Each lender will have their own interpretation of the new rules, but in general people are likely to be asked for more detail about regular outgoings such as childcare, food, household bills, loans, credit cards, toiletries, hobbies and leisure activities, in order to weigh up whether or not they can afford their home loan.

Lenders will also look for any impact that future life changes could have, such as when they plan to retire and how they plan to spend their old age.

There have also been reports of some people being asked if they are planning to start a family as lenders gear up to comply with the rule changes.

Read more: will rising house prices hit first-time buyers?

A spokeswoman for the FCA said that lenders will need to strike a “balance” between when to ask about the possibility that a couple might drop to one income by starting a family and when this is not appropriate.

Lenders will also have to apply “stress tests” to make sure someone could still afford their mortgage as and when interest rates go up. In some cases this could involve having to prove you would be able to pay a mortgage with a 7 per cent rate of interest.

Although the new rules do not formally come into force until 26 April, in practice lenders have been gearing up for them for some time as they have been anticipated since a discussion paper in 2009.

‘Difficult position’

Brokers warned that some people could find it hard to answer the open-ended questions being asked by lenders.

Andrew Montlake, a director at broker Coreco, said that for people considering applying for a mortgage “it’s important for people to prepare a lot earlier, potentially six months before you apply. Start looking through your documentation and go through a budget”.

Mr Montlake said most lenders will want to know whether mortgage applicants are planning to increase their spending for any reason in the near future and if they are expecting a change in their income.

Read more: is everyone a winner when house prices are rising?

He said such questions are “quite open and difficult to answer” but he added that “people need to be honest with their affordability anyway”.

Ray Boulger, senior technical manager at mortgage adviser John Charcol, said that people may find themselves in a “difficult position”, when lenders put questions to them about what may happen in the future.

He said that if a couple have a child and one parent stays off work for a year to look after the baby, the family may say when they apply for their mortgage that the parent is planning to go back to work.

But, if going back to work incurs childcare costs, Mr Boulger said the lender may focus on this extra expense rather than the additional income generated from having both parents in work.

Mr Boulger said: “The danger is that a mortgage that is difficult on one single salary could get declined on the basis it’s not affordable. Different lenders are reacting to this in different ways.”