Here at Think IFA we have been receiving numerous enquiries asking us about the MMR (Mortgage market review) so I have decided to write the following article on the matter to help explain what it is and how it will affect both mortgage holders and new applications.
Since the Mortgage crisis in 2007, there has been a need for greater stability in the mortgage market and a need for increased levels of control over those mortgage suppliers, and borrowers, who create an unacceptable level of risk in this arena.
And if you listen to the Financial Conduct Authority, they advise that the changes they are introducing in the form of the Mortgage Market Review on 26th April are going to herald a time of safer mortgage lending with greater protection to both the borrower and the lender.
But in reality this strict new legislation, which is set to cover all new mortgages and remortgages, is likely to make it much more challenging for any potential new home owner to get the funding they need. And it may even prevent some potential buyers from ever stepping foot on the property ladder.
What is the MMR (Mortgage Market Review)
Starting with an initial Discussion Paper back in 2009, the Mortgage Market Review is now a set of guidelines as laid out by the Financial Conduct Authority to kerb risky lending in the mortgage sector.
The MMR aims is to ensure that anyone wishing to take out a mortgage is not exposing themselves to an unaffordable level of debt. And it also aims to encourage mortgage lenders to only follow the most well advised business practices when it comes to assessing risk.
On the surface, such a change in process must be good news. It stops the poor practices of the past coming back to haunt us once again, and seems like a fantastic way to bring greater control in an area that can affect the entire financial stability of the nation.
But for the general man on the street such changes are going to hit much closer to home.
The MRR is going to mean a more intrusive mortgage application process that will dig deeper into your own personal circumstances so that the outcome to your new mortgage application is much more likely to be a sound and fast rejection.
Nothing Left Uncovered
If you thought your mortgage company wanted to know a lot about your financial situation before the MMR, then after 26th April you will be staggered by the amount of information they now require.
No longer will the basic income and expenditure figures be acceptable. Any mortgage application will have to be supported with a much more detailed breakdown of all your regular spending. From childcare and travel expenses through to how much you like to spend on the latest fashions, nothing will be left uncovered.
Any monthly bills, outstanding debts or contributions to savings, insurance or pension policies will have to be detailed as well as costs incurred for your children’s well-being and education.
Even expenses such as utility bills, service charges or ground rents will have to be included. And if you don’t have these figures to hand, then you need to start finding them as every detail needs to be disclosed before you can even start to be considered for new lending.
For some, such a level of information is always to hand and ready to produce, but for the majority of us, even finding out where to get this information from is going to be a challenge. And actually being able to produce the correct paperwork could use up so much time that it could mean the difference between success or failure when it comes to securing your dream home.
Rigorous Forensic Data Gathering
And if it wasn’t enough for your potential lender to discover every inch of your regular expenditure, they will now be looking at how you spend your spare cash too!
‘Rigorous Forensic Data Gathering‘ is a phrase which you are going to hear more and more often as the new MMR is applied, and it is set to become the excuse that your mortgage provider needs to look into every single penny you have ever spent.
Splash too much cash on takeaways, or buy too many rounds on a Friday night and the intensive search through your accounts and credit card statements could signal to a potential lender that your social choices are not in keeping with their new lending guidelines.
Seems crazy that the extra poppadum on a Friday night could stop you getting a mortgage? Well it is happening, and if your bank statements are not in line with the MMR approach, then that dream home could stay exactly what it is, a dream – never turning into reality.
Everything Has to be Documented
But it’s not just your expenditure that has to be detailed in full. There are also stricter legislations around income declaration which could leave many potential new home owners completely unstuck.
For bonuses, commissions or overtime, all have to be proven by documentary evidence in the form of payslips that may need to go back years. And when it comes to the deposit for your new home, that too has to be ready and waiting, with physical proof backing up your claims.
For those that have recently joined a new job, payslips have to cover both your current employer and your previous role. And when all that documentation is gathered, it will then be compared with a credit referencing agency to ensure everything you declare is above board.
No One Expects The Spanish Inquisition!
Even if you only want to remortgage to take opportunity of a better rates, let alone borrow extra cash, these new policies are going to draw out the time it takes for any application longer than we have ever known before.
For most, even the simplest transition is going to require financial advice or consultation, reducing the opportunity of making a quick win in terms of changes in rates.
And though lenders should have always looked at affordability to ensure you can cope with repayments, the stress tests that are now required to consider whether you can still meet repayments with differing levels of interest rates, is going to put every potential borrower well and truly under the spotlight.
But It’s Not All Bad News
As you have probably realised, the Mortgage Market Review is going to affect almost everybody, and most not in a good way. These new changes are going to make the mortgage application process slower. And for some, it is going to mean there is now no possibility of getting a mortgage.
But that isn’t always a bad thing. However, by making it harder to move suppliers or remortgage, those with existing borrowing could find themselves trapped in more expensive products when cheaper rates are available.
Furthermore, those with greater levels of expenditure, such as large families or those with dependent parents or relatives, will find that their greater level of spending could actually stop them qualifying for a home all together, even if they feel they could afford the extra debt.
And if you have ever had credit problems in the past, or even changed jobs too many times, then these fluctuations in your credit score could put pay to any hopes of owning a home of your own.
Self-Certified mortgages, fast-track mortgages and extended income multiples are all set to become a thing of the past, which is great for those that have fallen foul of expensive mortgages in the past. But that fast track path for low risk mortgages is now well and truly closed. And if you were banking on finding a low cost interest-only mortgage to set you on the property ladder, then things are set to become a lot harder.
Greater Level of Security
Under this new system, those that do get through the process can be a lot more confident that the final product they have is the right one.
From April 26th, all mortgage intermediaries will be legally required to hold a relevant mortgage qualification, so that the information you receive is much more likely to be reliable.
Furthermore, the ‘non-advised’ sales process will become a thing of the past. If you talk to any intermediary about your mortgage, then they will have to offer you advice. But if you want to avoid such complications, the ‘execution only’ process for online sales will ensure you take full responsibility yourself rather than thinking you have received advice from an expert when really you have had no such thing.
They Way Forward
The MMR takes us back to a time of increased paper work and legislation in a mortgage market that is likely to be subject to increased costs and lengthy delays.
And when it comes to paying those costs, there is every chance they will come back onto the applicant in the form of upfront fees and possibly even higher rates.
This new process puts pay to the innovative product development that was leading us into a time of more dynamic and flexible borrowing in the housing market.
However, these changes will result in a more solid foundation of borrowing for homeowners and result in more potential homeowners seeking advice for their mortgage.