What has changed?
On 26 April 2014 new rules came into force which changed the way that the sale of mortgages is regulated.
The Financial Conduct Authority (FCA), which regulates all mortgage lenders in the UK, has changed its rules following a long and detailed review. These new rules, known as the Mortgage Market Review, will alter the way that a lender considers whether to lend to you when you apply for a mortgage.
How does this affect me?
A lot of the changes are happening behind the scenes. These affect lenders’ systems and controls and won’t have a direct impact on your mortgage application, but there are two main things that will make a difference:
- to apply for a mortgage you will need to speak to a mortgage adviser who will advise you on which mortgage is right for you; and
- your lender will need to see details of your income and outgoings to make sure you can afford to repay your mortgage both now and in the future.
These changes are explained in more detail below.
How do I get advice?
When you apply for a mortgage you will need to see an adviser at your building society, bank or at a mortgage broker/financial adviser. The mortgage adviser at whichever firm you choose will talk to you about your needs and circumstances; your spending patterns and future plans and they will recommend a mortgage which is right for you. This new process is likely to take longer than it would have done previously but brings with it the peace of mind that the mortgage you take out is the right one for you.
The adviser will tell you about their charges and the range of mortgages they are able to advise on when you first speak to them. Typically an adviser at a building society or bank will be able to recommend a mortgage from their own product range, whereas a broker/financial adviser may be able to recommend a mortgage from a range of lenders.
Do I have to get advice?
Yes, there will be very few exceptions to the requirement for advice. You may be able to go ahead without advice if you are a high net worth borrower (earn more than £300,000 per year or have more than £3 million in net assets); if you are a mortgage professional; or you are remortgaging your home solely to raise capital for your business.
Some people may choose to apply for a mortgage where there is no interaction with a lender, for example by applying online. Under these circumstances you would need to know exactly which mortgage you wanted. Anyone considering applying in this way, often called execution only, should be aware that they will lose some of the protection achieved through taking advice. For example you would not be able to complain later that the mortgage you took was unsuitable for you.
How will the lender check whether the mortgage amount is affordable?
Lenders will decide how much you can borrow based on your income and expenditure.
Your lender will ask you questions about your monthly outgoings. They will consider different types of expenditure when deciding whether the mortgage you have applied for is affordable, so will ask you questions about:
- committed expenditure, things like: Loan payments; credit card bills; child maintenance and school fees.
- basic living costs: includes: Council tax; utilities (gas, electricity & water bills) ; phone bills; cost of travel to work; insurance premiums and food.
- quality of living costs, This category will be quite wide but could cover: Spending on clothes; entertainment and household goods amongst other things
You should tell your lender if you expect your income to come down or your spending to go up materially in the foreseeable future.
As well as checking whether you can afford your mortgage at the outset, your lender must also check whether you can afford your mortgage payments over the next five years if interest rates go up. These checks will be carried out whether you are in employment, are planning to retire or have actually retired.
How will the lender check my income?
Your lender will need to verify your earnings, so you should bring evidence of income with you when you see the mortgage adviser.
If you are employed, showing payslips and P60 will normally be sufficient. If you are self-employed you are likely to need to show your tax returns, accounts, business plan or projected earnings.
If you have other sources of income like shares, bonuses or a pension that you want to be taken into account you will need to show documentary evidence to demonstrate how much you earn from these.
Will this new process take longer?
The time it takes to get a mortgage will vary depending on your circumstances, but you can speed the process up by checking ahead with your mortgage adviser on the information they will need to see.
What if I am remortgaging?
If you already have a mortgage and want to move to a new lender you will need to go through the checks described above. If you want to stay with the same lender - for example if you are coming to the end of a fixed rate deal; you are not borrowing any more money and you are not changing the terms of the mortgage, for example the repayment period, you may not need to go through all of the checks described above.
Where can I go for more information?
The Financial Conduct Authority
The Money Advice Service
Your local building society