If you want to buy a home, it’s likely that you’ll need a mortgage. That means you’re going to be affected by the new mortgage rules which have come in because of the Mortgage Market Review (MMR).
It’s not a complicated set of rules. Really it’s all about making sure that you have the money to pay back the debt. However, loads of people don’t know what they’re about so we’ve put together this article to guide you through the changes; why they came into place, what they are and how they affect you.
Knowing the rules may mean the difference between getting accepted or rejected.
- What are the new mortgage rules?
- Why were the mortgage rules changed?
- What do the new mortgage rules mean for me?
- Tips to bear in mind when you apply
The biggest change to the mortgage rules is there is now a much greater focus on making sure that the borrower will be able to make the repayments.
Lenders have to look closely at your income and outgoings before they can approve a loan.
The lender must check not only that you’
are able to afford repayments now, but also if you would be able to continue making repayments if the interest rates go up.
At the moment the interest rate is low, so it’s important to work out whether you could make the repayments if the interest rate went up. For example, it’s not long ago that mortgage rates were around 7% so lenders need to know that you could pay if they went up to that rate.
The mortgage market had worked out well for many people, with borrowers able in some cases to borrow the full price of the home with an additional loan, and they only ha to pay back the interest on the loan.
But this was high-risk lending with mortgage companies not required to get proof that people would be able to pay back what they were borrowing.
As a result, when house prices fell, people found themselves in negative equity (in other words their mortgage was higher than the actual value of their home.) Equally, because adequate checks had not been made, people who lost their jobs or had their hours cut were not able to make the repayments on the loan.
As lenders have to ensure you’ll be able to make repayments not only now but also in the future, you’re going to be asked a lot more questions – and they’re likely to be nosey ones!
You will need to be able to prove your income. If you’re employed this would be in the form of payslips, or if you’re self-employed you will need accounts and tax returns.
You will also have to tell the lender your various outgoings. This includes essential expenses, such as:
but you may also be asked about other expenses. This could be anything from how much you spend on clothes to how much you spend on transport and even gambling!
You will have to notify the lender if you think your income or outgoings are soon to change (for example, if you are going to be working fewer hours.)
If your mortgage is set to last until after you retire you will have to show the lender you’ll be able to make repayments once you’ve retired.
As a result of this, applying for a mortgage is now a lengthier process, with phone interviews increasing from 30 minutes to around two hours.
- Check your credit record before you apply. You get a FREE credit report here, so check it now.
- Make sure you’re on the electoral roll because that is something they will check.
- If you’ve been frugal and never had to borrow before then you may be penalised for having no credit record. Take out an agreed overdraft or spend a little on your credit card and make sure you pay it back on time. This will help to build your credit rating.
- Save as much as possible so you can put down a bigger deposit. The bigger the deposit you put down, the less you will have to pay for your mortgage.
- Be realistic about what you’re going to repay. It’
is important to have a good understanding of your household’s income and outgoings.
- Think logically about when you apply for your mortgage. If you apply before starting a family then you will have fewer outgoings and therefore are more likely to be able to borrow.
- Clean-up your household budget. If you have outgoings for something you no longer use, such as a gym membership, then get rid of it! In fact it’s a good idea to cut back your spending a few months before you apply to minimise your outgoings.
- If you’re rejected by a lender, don’t go straight to the next one as this will damage your credit rating. Instead check your credit report to make sure there are no mistakes. If everything is in order it is worth asking the lender why you were rejected.