Getting the green light for a mortgage has been tougher in the years following the credit crisis. But since April 2014 when the Mortgage Market Review (MMR) was introduced by regulator, the Financial Conduct Authority (FCA), the screws have been tightened even further.
Here are five takeaways to prepare yourself for the (not-so-brave) new world of mortgage applications:
1. You'll need to take advice. This can be from a financial adviser, mortgage broker or even the bank or building society you are applying to direct. If you are not paying for the advice, they will need to tell you how they get paid and how much. If you are applying for a mortgage online or by post, you may not need to take advice. But you'll still need to demonstrate you understand the process and the mortgage deal.
2. The process could take longer. Most mortgages are now sold on an ‘advised’ basis, which MMR rules are very prescriptive about. An advised sale involves a face-to-face or telephone interview, which can take two or more hours, so get comfortable.
3. Your finances will be under greater scrutiny. MMR rules require a detailed assessment of whether your mortgage is affordable both now and in the future. This means that ALL of your monthly expenses, not just household bills, will be gone through with a fine-toothed comb. This includes gym memberships, TV packages, grocery bills and even nights out on the town.
4. The amount you can borrow could be capped. As lenders are required to ask more probing questions about what you spend each month, the cash left over to fund your monthly mortgage repayments may be less than if you'd made the application before the days of MMR. The impact of this could simply mean you are offered a lower sum of cash. Difficult if house prices are rising!
5. Interest-only mortgages are the exception, not the rule. It's still possible to take out an interest-only mortgage – but these deals are now a niche offering. You will also be asked to show proof of a full plan of how you will repay the capital when the loan matures. And you'll be called on at least once during the interest-only period to give an update of how this is going.
The purpose of MMR is to ensure borrowers know what they are getting into when they take a loan, and can comfortably afford to pay it over the full term according to the lender's forecasts and calculations.
But inevitably, this also brings more admin. So plan and get all your paperwork in order (that's bank statements, payslips, accounts, and household bills) in plenty of time. In a fast moving property market, being prepared like this could make the difference between getting a property and losing it.