Homebuyers can expect to face far tougher questioning from mortgage companies on mortgage applications made from the 26th April. This is when the long-planned Mortgage Market Review (MMR) rules come into force.
Until now the initials 'MMR' have usually referred to the controversial vaccine for children. But from next week anyone applying for a new mortgage, and many applying to vary an existing mortgage, will come up against the new MMR rules for lenders and brokers. This new form of MMR is likely to prove every bit as controversial to homebuyers as the vaccine was to parents.
The MMR rules have been planned for some years. But only as the deadline for their implementation comes into sight have commentators woken up to the effect they will have on new mortgage applications.
Why are the new MMR rules required?
In the wake of the financial crisis in 2007/8 and the subsequent collapse of the housing market mortgage lenders were criticised for irresponsible lending policies. Money was often lent on the basis without checking whether borrowers had sufficient income to afford the repayments.
High loan-to-value mortgages were easily available, often on the basis of over-optimistic property valuations. Interest-only mortgages were also widely offered and borrowers did not need to show what arrangements they had made to repay the mortgage at the end of the term as it was assumed that they would be able to sell the property within a year or two at a substantial profit.
These lending policies not only caused problems for lenders when the market crashed, but also caused severe distress for many borrowers who found themselves unable to keep up mortgage repayments and unable to sell their property for anything like the price they had paid for it.
Mortgage Market Review intended to ensure responsible lending
In the light of the crash the Mortgage Market Review was planned to ensure that lenders would have to lend responsibly in future, and to regulate the activities of mortgage brokers and intermediaries.
The MMR rules are designed to protect borrowers from borrowing more than they can comfortably afford, and also to ensure that mortgage companies are less likely to get into financial difficulties themselves.
MMR could make it tougher to get a mortgage
It has been suggested that MMR will restrict the mortgage market and make it harder for buyers to get a mortgage. In particular it could make things more difficult for first-time buyers and for the self-employed.
Two major requirements of the new regime are that lenders must show that they have considered whether an applicant will be able to afford the mortgage repayments during the life of the mortgage, and that it must itself verify the applicant's income.
In future lenders will not be able to take into account an expected increase in property prices when assessing whether a borrower will be able to pay the sums due.
The new affordability test
Lenders will have to take full account of the income of the borrower, net of income tax and national insurance; and also:
- The borrower’s committed expenditure
- Their basic essential expenditure
- Basic quality of living costs of the borrower’s household
Affordability will have to be assessed on the basis of both repayment of capital and payment of interest over the term, (except where lending under the interest-only mortgage rules) and also take account of the impact of likely future interest rate increases on affordability.
There will also be much tougher rules on proof of income. Lenders will themselves have to obtain independent evidence of a borrower’s income, even if information has already been obtained by a broker. Self-certification of income will no longer be possible.
The new rules will undoubtedly make things harder for the self-employed. People on fixed-term contracts or who make the bulk of their income from overtime, commission or other non-guaranteed sources of income will also have more difficulty in proving that they have a sufficient level of income to afford the proposed mortgage.
In this respect those who have an existing mortgage may be better placed than first-time buyers, as a lender can use information it already holds about a customer’s income.
Lenders will also have to take into account any likely changes to income and expenditure when assessing whether a borrower will be able to pay the sums due. This will include reductions in income occurring from retirement or redundancy.
Interest-only mortgages may disappear
Although interest-only mortgages are not prohibited borrowers will need to demonstrate that they have a credible means of paying off the loan at the end of the term. Most of the traditional methods of paying off interest-only loans, such as endowment policies, have now been discredited. So it is likely that for most borrowers the full repayment mortgage (i.e. where monthly payments include part capital and part interest) will be the only viable alternative.
MMR could affect the recovery of the housing market
It is widely predicted that MMR will have an adverse effect on the housing market. Many think that it will become harder for borrowers to obtain a satisfactory mortgage offer. There are also concerns that property sales will be delayed as borrowers will need to provide suitable evidence of income and expenditure as well as having to attend lengthy interviews with lenders, before a lending decision can be made.
Reforms to the mortgage market were undoubtedly necessary to protect both borrowers and lenders. But it will be a pity if the reforms coming into effect on 26 April have the effect of stifling the current recovery in the housing market.
Readily available mortgage finance is an essential part of a properly operating market, and any reduction in the availability of finance will rapidly cause a set-back to current growth.
It is to be hoped that lenders and mortgage brokers will already be up to speed on implementing the MMR rules to ensure that applicants face the minimum of delay once they come into force. But homebuyers should be aware that they can expect to face far more intrusive questioning than previously when making any new mortgage application.