In April (2014) the new rules for mortgage lending introduced by the Financial Conduct Authority (FCA) in the UK came into force.
These rules are known as the Mortgage Market Review guidelines and they aim to protect the consumers and make sure there is no repeat of the irresponsible lending that occurred before 2008.
So far so good; after all, some regulation preventing excessive borrowing could not be such a bad thing.
As usual, the devil is in the detail.
These much tougher guidelines, coupled with the withdrawal of cheap funding for bank and building societies and seen through the continuing increase of house prices can have several interesting and undesirable effects. These are likely to lead to:
- Much increased affordability checks where mortgage applicants will be required to provide information about all monthly payments and expenses and will be asked to provide evidence and validation. This is obviously time consuming for the borrowers as well as the lenders.
- Stress testing which apparently some lenders are already doing. About 50% of the borrowers will be obliged to see a qualified mortgage adviser.
- These are expected to result in more admin workload, longer time to decision on mortgage and higher fees.
- There have already been reports that following these rules is overloading the ‘back room’ of the banks and building societies.
What do these changes mean for you?
One thing you, my reader, will need to concern yourself with is whether you’ll meet the new, stricter affordability rules.
In fact, your chances of getting a mortgage and buying your own home are very slim if:
- You earn less than £25,000 per year (just to put this in perspective, the average salary in the UK is £26,500 but averages are deceptive: four in five new jobs are in sectors averaging £16,640 for a 40 hour week).
- You have a small business (a very sizable proportion of the UK economy consists of micro enterprises).
- You are self-employed or freelance. Here I’d like to point out that we already are seeing a generation where the majority of people are self-employed or freelance. This is not a temporary bleep in labour markets and its staying power is confirmed by the fact that the middle range, middle income, middle class and entry for people with degrees jobs are mostly non-existent.
- You have passive income sources like pensions, equity in a business and/or rental income.
In other words, these new rules that are meant to protect the consumer are to be expected to keep out of the housing market most ‘mortgage misfits’.
It seems to me that we can expect changes to the housing market – and the financial services around it – that reach much deeper than we can see at the moment.
Apart from all else, these new regime will demand a different way to manage your money including the financial discipline to get out of debt, to save larger deposit and the grit to earn more.
There is another ‘elephant in the room’, namely the scarcity of affordable homes in the UK.
Paul Winter, Chief Executive of Ipswich Building Society, says:
“The Government needs to address housing supply issues rather than potentially limiting those on average incomes from obtaining a mortgage. Many aspirational home owners are facing a double lock: unavailable lending and a lack of homes to choose from.”
If you prefer to look at information as pictures, have a look at the infographic below.