Tougher mortgage lending rules come in to force at midnight tonight. If you are thinking of buying (or in some cases re-mortgaging), they will almost certainly affect you. But will they also affect the property market as whole by shrinking mortgage lending?
First things first, the rules require anyone applying for a mortgage (or to extend or increase their existing mortgage) to go through much more rigorous checks on their ability to afford the repayments. Lenders are required to show that they have properly understood your financial circumstances in detail before deciding how much to lend. Expect any meeting with your financial adviser to be lengthy and, quite possibly, intrusive. The graphic from the Money Advice Service usefully encapsulates the sort of information that lenders will require from borrowers.
Lenders will also have to ‘stress test’ your application, working out if you could still afford your repayments if interest rates rose substantially. Once they have completed that analysis, they will decide how much you can afford to borrow and thus how much they are willing to lend.
In some ways, this is a perfectly sensible return to prudent lending and a creditable attempt to prevent a rerun of the anything goes lending before the credit crunch. In other ways, it’s a little silly – failing to recognise that people change their spending patterns as their circumstances change. For example, the Financial Conduct Authority suggests that lenders take in to account spending on clothes, furniture, appliances and personal goods such as toiletries. Personally, I reckon those come a very poor second place compared to paying the mortgage.
But if the new rules might make it harder to get a mortgage (or at least a mortgage of a size you originally aspired to), will this have a wider effect on the property market as a whole?
You would think the answer would be yes, but the evidence at the moment suggests than any impact is likely to be minimal. Here’s why:
a) Most lenders are already applying the new rules without any appreciable impact on lending so far.
b) Many of the major lenders are planning to significantly increase their mortgage lending this year even though they have known for some time that the new rules were coming in to force. That doesn’t suggest that they think the rules will prevent them from lending.
c) Lenders are increasingly competing for borrowers – after all, they make their living by lending money. If they apply the rules in a way that makes it difficult for them to lend or attract borrowers, they are likely to make changes to their approach pretty quickly.
d) The rules don’t place a cap on the maximum loan to value or the maximum multiple of income that someone can borrow. In other words, you could still borrow 95% of the purchase price or five times your income, for example, provided the lender is satisfied that you can afford it.
Finally, the rules don’t mean that buyers can’t get a mortgage – just that the amount they can borrow might be less than they had hoped for. In current market conditions, that is more likely to increase demand for properties further down the price scale than it is to depress prices across the market.