I was recently interviewed on BBC Radio Wiltshire about some of the mortgage changes that were brought in earlier this year. To listen to the interview, please click here:
From April 26th 2014, the regulator’s Mortgage Market Review (MMR) comes into force. This is an attempt by the regulator to try and reform the market and to constrain some of the higher-risk lending that was more prevalent in the build up to the financial crash in 2008. There are various aspects to the MMR, many of which some lenders have already implemented prior to next month. One of the key focuses is a greater emphasis on checking affordability. This means a ban on self cert lending (where no income evidence is required) although in practice, lenders haven’t offered these for several years. It also means lenders will pay more attention to commitments and spending patterns, as well as taking into account future rate rises when calculating affordability. Some feel this may lead to more declines after being implemented.
Other changes include a requirement for mortgage sales to now be on an ‘advised’ basis and for interest only lending to only be permitted where there is a clearly defined and acceptable repayment strategy in place, though once again, this is something many lenders have already implemented. It remains to be seen how much of an impact these changes will have on the timescales in getting a mortgage agreed but for anyone hoping to secure a mortgage in the weeks/months after April, it would be advisable to allow additional time in case of lender delays.
Self certification mortgages (or self cert) were widely available in the years leading up to the credit crunch. These were essentially mortgages that allowed someone to apply for a mortgage and declare an income to a lender without that person needing to provide any evidence of this income. Rising house prices and a more relaxed approach to mortgage lending meant that lenders were willing to waive this requirement at that time, but since lending criteria has tightened, the last self cert mortgages have disappeared and the Financial Services Authority has made it clear that there is a requirement on all lenders to ensure the mortgage amount is affordable before agreeing to lend.
Self cert mortgages were used by all sorts of borrowerers but were particularly aimed at the self employed who may find it more difficult to accurately provide up to date evidence of their income. Because self cert mortgages no longer exist, some self employed people feel that they may struggle to obtain finance. However, it is important to realise that lenders vary in how they assess a self employed person’s income. Most lenders will want 2 or even 3 years accounts, but some will consider lending with only 1 years figures. Some lenders will work from average income over several years, others will focus on the past year, and with others, it depends on the trends, whether increasing or decreasing and the amount of fluctuation. Increasingly, I see people who have set up their own limited companies, and again, lenders vary when it comes to assessing this income with some basing on salary and dividend income taken and others assessing based on salary and share of operating profit.
If self employed and want independent advice and help on this or any aspect of obtaining mortgage finance, please contact me.
The Spring Budget announced 2 plans designed to help encourage home ownership. The first was an extension of a scheme already in place that was previously aimed at first time buyers and has now been opened to everyone. Under this scheme, buyers need to find only a 5% deposit with the government providing a 20% interest free loan for the remainder of the deposit. The loan must be repaid when the property is sold or can be repaid earlier if in a position to do so. If still in place after 5 years, then interest becomes payable on the loan. This scheme is restricted to certain new build properties only.
The second part of the plan is designed to be more widespread but is only at an early stage. Again, buyers will need a 5% deposit, but the government is then planning to offer guarantees to lenders for some of the mortgage, effectively indemnifying them against potential losses should they in the future have to repossess the property. This is similar in practice to the Mortgage Indemnity Guarantee (MIG) or Higher Lending Charge (HLC) that were fairly commonplace in the 80’s and 90’s. It is aimed to be brought in from January 2014. At this point most of the details are unclear but the hope is that it may encourage more lenders to offer to lend to those with smaller deposits.
The majority of high street lenders have a maximum age that they will not lend beyond. This is typically age 70 or 75 but varies from lender to lender. Care needs to be taken to ensure that any mortgage is expected to be affordable throughout the term but this ‘one size fits all’ approach is not always helpful to people who may be able to demonstrate they have sufficient retirement income to cover a mortgage payment. A good independent adviser should be able to help these borrowers find lenders that will lend beyond the mainstream maximum ages and a suitably qualified adviser in Lifetime Mortgages should also be able to give advice as to whether this option may be more appropriate.