By now, you will have seen the news coverage on the new mortgage rules and “stress test” that came into force for all lenders on 26th April. But what do these changes mean in practical terms?
In today’s blog, we explain the new mortgage rules in plain English to make them easy to understand. We’ve also outlined the key preparation you will need for the new application process, so you’re in the best position to secure the home finance deal you want.
Mortgage lenders have been asked to make changes to their application process by the Financial Conduct Authority. The application process will now be more thorough, with a requirement for financial advice. The process also involves some new steps, including a “lifestyle quiz” and ”stress test”
Why has it changed?
Put simply, mortgage lenders need to make sure that you – as a homebuyer – can comfortably afford to pay your mortgage.
Circumstances change, and interest rates can rise as well as fall, and it’s important for lenders and borrowers to take these potential fluctuations into account before committing to a mortgage. This not only gives lenders additional information and reassurance about borrowers, but it means you will be fully prepared to take this financial step.
The Stress Test is a way of measuring how well you will manage your mortgage if interest rates change. Interest rates have been low in the past few years, which has let many borrowers take advantage of great mortgage deals.
This is a change that makes great common-sense, because it lets you and your lender see what your repayments look like if interest payments rise, and gives you reassurance about the affordability of the home you’ll be buying. Lots of lenders are applying an interest rate stress test of 6% to 7%. This means that you will have to demonstrate that you have room in your disposable income to meet the additional cost of your monthly mortgage repayment at a higher rate.
Using a mortgage calculator can help you to see at a glance what your repayments will look like if your interest rates rise.
In addition to proof of earnings and essential expenditures, you will now be asked to give details of your regular monthly spending habits. This will let lenders more accurately assess how much you can afford to borrow.
The specific questions you will be asked will vary from lender to lender, but expect to answer some of the following questions:
· Do you expect any major changes in your circumstances (for example, are you planning a wedding or starting a family?)
· Are you likely to change careers, start a business or become self-employed in the near future?
· Have you ever taken a short term or payday loan in the past?
· Do you regularly visits restaurants and theatres, and how much do you spend on leisure and entertainment?
· How much do you regularly spend on non-household items, including hobbies, personal grooming, haircuts, parking, gym membership and clothing?
All “interactive” mortgage will now need to be advised. This means that if your mortgage application is a face-to-face process, you will need to obtain some form of financial advice from either a mortgage broker, a lender or an independent financial advisor.
For borrowers, this actually has a lot of advantages. You will have the full details of your new mortgage explained in depth, guidance and assistance with your budget, and the chance to request advice on whether it’s the right home finance for your circumstances.
At Stewart Milne Homes, we offer free consultations with independent Financial Advisors. These advisors can talk you through the new application process in detail, answer any questions you have, and give advice on the right product for your needs and circumstances.
Want to know more? Make an appointment with a financial advisor today.