Guidance for mortgage applicants in relation to future changes/ life events
Who produced this guidance?
This guidance was produced by the Council of Mortgage Lenders (now part of UK Finance) and the Building Societies Association (BSA).
UK Finance and the BSA are industry trade bodies representing mortgage lenders operating in the UK. Together we represent virtually all UK mortgage lenders including banks, building societies, specialist lenders and credit unions.
Who is the guidance for?
This guidance is for anyone applying for a residential mortgage in the UK.
What does this guidance aim to do?
This guidance aims to provide consumers applying for a mortgage in the UK with more information about the rules that lenders have to follow, particularly regarding the assessment of the potential impact of known life events, or future life changes on the decision of whether and how much to lend. Life events/change happens to us all and may include things such as redundancy, maternity leave, adoption and divorce amongst many other things. Customers looking to obtain a mortgage should expect to be asked certain questions related to this topic as a standard part of the mortgage application process.
What do lenders do when assessing a mortgage application?
Mortgage lenders have to comply with lending rules set down by the financial services regulator in the UK – the Financial Conduct Authority (FCA). The FCA is responsible for ensuring that mortgage lenders follow its rules when they take on new mortgage lending or make changes to existing mortgage contracts. A crucial part of following these rules means that mortgage lenders must ensure that the person (or persons) taking out the mortgage can afford to pay it back.
In April 2014, more detailed mortgage lending rules will come into force. These rules require mortgage lenders to check your income and demonstrate that the mortgage is affordable for you having taken into account your income and expenditure. This assessment will be done on the basis of objective criteria which the lender will apply equally to all applicants.
As part of the process of assessing affordability, lenders must consider whether there might be any future changes to your income or committed outgoings/living costs which could affect your ability to meet your monthly mortgage repayments. As lenders cannot predict how an individual applicant’s circumstances are likely to change, they will rely on the applicant/s to inform them of any known or anticipated life events/future changes. These changes might include; known redundancy or other changes to employment status, whether these are temporary or permanent, including retirement, divorce or maternity leave.
It is important to be aware that lenders are not allowed to approve a mortgage application if they have evidence that suggests that you will not be able to afford to repay the mortgage now or in the future. Mortgage lenders will base their lending decision on their assessment of your ability to repay – this is because they want to be as sure as possible that they lend you an amount that you can afford to reduce the chances of you getting into difficulty paying your mortgage.
What questions can I expect to be asked about my future circumstances when applying for a mortgage?
All lenders will be seeking to assess if you can repay the mortgage and will therefore ask you questions about your income and expenditure, including what you may know about any future changes which could impact on your finances.
You will also be asked to provide evidence of your income by providing things like bank statements or pay slips. Lenders will do this and ask similar questions of all applicants.
In order to judge whether there are any future changes that may impact your ability to repay, your lender may ask you a general question along the lines of:
"Are you aware of any changes to your income and expenditure that are likely to affect your ability to meet your mortgage payments?"
Your lender will use all the information you provide to assess how much they can lend so that you borrow an amount that reflects your circumstances. It is therefore important that you make your lender aware of any possible changes which you know of that could affect your future income or expenditure: Things like potential redundancy or forthcoming retirement. The lender will take your answers into account when assessing your mortgage application.
In addition your lender may also ask you to provide proof of your future financial situation where this is relevant and possible. An example to show this follows, exactly the same will apply to other life events also:
Example - when an applicant is pregnant or on maternity leave when applying for a mortgage
Your lender will want to understand your circumstances with as much certainty as possible when you make your application. To do this, they will ask you a general question about whether you are aware of any changes which could affect your ability to meet your mortgage payments (as outlined above).
Your lender should not ask you directly whether you are either: planning to have a baby; are pregnant; on, or planning to go on, maternity leave.
In most cases, like any other period of absence from work, a period of maternity leave is likely to be a change that most applicants would expect to impact,, even if only short term, on their financial circumstances. Any such impact should be disclosed as it could have an effect on your ability to pay your mortgage.
The lender cannot discriminate against you for going or being on maternity leave and will take a rounded view of your application based on your income when you return to work, taking into account any anticipated child-care costs.
If you are planning to stop working, or to reduce your working hours, after your baby is born, or if for some reason you are not entitled to maternity pay, this will clearly have an impact on your income and may impact your ability to meet your mortgage repayments. It is obviously important to tell your lender about your plans, otherwise they cannot accurately assess how affordable your mortgage will be for you when your financial circumstances change.
If you are able to demonstrate how you will repay the mortgage during your maternity leave and beyond, then your lender may not ask you for any further information. However, if you have concerns about meeting your mortgage payments while you are on maternity leave, and you tell the lender, they may then ask you additional specific questions about how you expect your income and expenditure to change. This could include questions about:
- Your maternity pay, savings or any other income you may have, and, where applicable, what your childcare plans are.
- What evidence you can provide to support your application and provide proof of your future circumstances. This could include a letter from your employer setting out the details of your maternity leave, maternity pay, and any expectations about your future return to work.
- If you are self-employed and are on or planning to take maternity leave, your lender will ask you to provide evidence of your income and expenditure in the same way as any other self-employed person applying for a mortgage. This could include business plans and projections of future income after any period of maternity leave.
Your lender may also take into account the additional costs of having a baby in your household when they assess your outgoings.
Lenders will also ask similar questions, and request similar evidence, from male applicants who advise their lender that they are starting a family, or planning to take extended paternity leave.
Similar income and expenditure questions will be asked in relation to other life events/changes too.
What if I apply for my mortgage through a broker?
Brokers act on behalf of lenders to assess an applicant’s ability to repay their mortgage. If you apply for your mortgage through a broker, you can expect to be asked similar questions, and you will need to provide similar evidence of your income, in much the same way as if you apply for a mortgage direct.
What should I do if I have a complaint?
If you are concerned that you have not been treated fairly, please contact the lender that you applied to or the broker you applied through in the first instance. If you are unable to resolve your issue with this organisation you may refer your complaint to the Financial Ombudsman Service.