Are you aware of the new mortgage rules?

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On the 26th April 2014, the governments Market Mortgage Review (MMR) rules came into force.

The Financial Conduct Authority (FCA) carried out the Market Mortgage Review of the mortgage sector in response to the financial crisis of 2007. It is a move made in an attempt to avoid homebuyers taking out loans that they cannot afford.

But how many people are aware of the effects of the new rules? According to recent research, not many.

A survey carried out by the global information services company Experian states that three quarters of would be homebuyers do not know what the MMR is. The survey says that:

  • 43 per cent believe the introduction of MMR means that they can apply for a mortgage with smaller deposits. In fact, homebuyers may need larger deposits to make mortgage repayments more affordable.
  • 19 per cent believe lenders will relax lending, yet many expect lending to become much more stringent.
  • Just 44 per cent of those surveyed are aware that the new rules will mean that lenders will more carefully ensure that mortgage applicants can afford their repayments.
  • Only 15 per cent are aware that they will need to speak to an advisor before getting a mortgage.

So what has the Market Mortgage Review changed?

The main question left around MMR is the effect that it will have on potential homebuyers. Many are seemingly lacking information on the new rules and what they need to do before applying for a mortgage.

The FCA brought in the new rules in an attempt to encourage affordable lending. This means that there is a greater need for homebuyers to prove how they can manage their mortgage repayments. So, mortgage lenders will require homebuyers to go through a number of checks.

Affordability checks

Affordability checks will look much further into a homebuyer’s ability to continue to make repayments. Initially, lenders will need you to prove your income. This could mean providing payslips or if you are self-employed, showing tax returns and accounts.

An advisor or lender will also request that you confirm your spending. This means that they will take your monthly outgoings and household expenditure into account. Lenders must work out how much of your income you can afford to spend on your mortgage repayments.

Expenditures taken into account include:

  • food costs
  • gas and electricity bills
  • telephone bills
  • council tax
  • clothes expenditures
  • basic leisure costs
  • debt repayments

Stress testing

The new affordability guidelines will now involve stress testing against future rises in interest rates. Mortgage lenders will check that you can afford your repayments if they go up. They will look to test how interest rate changes may affect your repayments over a minimum period of 5 years.

How can homebuyers prepare?

Under the new rules, it is important for homebuyers to plan a clear budget for their expenditures. However, the research carried out by Experian suggests that many are not making prior plans.

  • Only a fifth plan to make a six month budget for their finances.
  • Just 26 per cent plan to clear outstanding debt.
  • A third of people plan to cut back on luxuries in the lead up to their application.

To ensure that you are best prepared for your mortgage application, it is key to make a detailed financial plan. Gathering information on your income and expenditure will help you budget in the lead up to your application.

We advise that you begin preparing your finances as soon as you make the decision to search for a new home. This will show lenders that you are living to a sustainable budget for the long term.

Contact Farnworth Rose Solicitors

Our expert conveyancing solicitors can help you in many aspects of the buying process. We are always on hand to offer any advice and guidance that you may need.

We understand that buying a new home can seem like a daunting process. That is why we are here to ensure that you always have the very best representation.

Call us today on 01282 695 400 to speak directly to a specialist conveyancing solicitor.

Or, click the button below to complete our quick online conveyancing quote calculator.