Mortgage Market Review is a good move

Changes to the mortgage application process under the Mortgage Market Review (MMR) came in to immediate effect on 26 April 2014.

The new rules aim to ensure that only those who can afford mortgages are able to secure them.

This should absolutely be considered a positive development and one that will tip the scales against a series of other new initiatives which have, in recent times, led to widespread talk of
the creation of a much-feared ‘housing bubble’
in the UK.

This said, the changes to the mortgage applications procedure are likely to cause further delays to the home-buying process and, in rare cases, may even cause an increase in the number of transactions falling through.

Financial status

A recent survey commissioned by the Conveyancing Association found that for over half (52 per cent) of those who have bought or sold a house in the last five years, the transaction took longer than expected, with just under half (48 per cent) saying the process involved unforeseen delays.

Although a figure has not yet been given for how much time the additional paperwork the changes to the mortgage application process under the MMR will add to the home-buying process, looking at these in a bit more detail, we can presume this will be considerable.

Why? The new rules will require applicants to supply evidence of their financial status quo and affordability direct to the lender, rather than a financial adviser, as before.

While this will include the presentation of traditional financial documents such as payslips and tax returns, lenders will also require customers to provide an outline of their day-to-day spending in much more depth than ever before.

Spending will be broken down in to three areas: essential expenses (this will include food, utilities, insurance); basic living costs (including clothes, furniture appliances, personal goods, leisure) and other commitments (such as credit cards and loans and maintenance).

In essence, this means that whether or not those seeking to secure a mortgage loan can actually afford one will be examined with much greater scrutiny – with lenders in some cases requiring an outline of the cost of an applicant’s haircut – as part of the process to determine whether or not a mortgage loan will or will not be granted.

In addition to the scrutiny of an applicant’s current financial situation, under the new rules there will be a much greater focus on a customer’s future affordability – with lenders asking potential home buyers to outline how they would keep up with increased interest rates for example, in an additional ‘stress-testing’ process.

For interest-only loans, the lenders will be asking customers for a plan outlining how they will repay the loan once the interest-only period ends; a significant shift from past experiences, where the customer was warned to have a repayment strategy in place, but wasn’t required to prove it.

How stringently the new rules are imposed will vary slightly from lender to lender, as each will have their own version of these and requirements for customer affordability will as a result differ.
It may be that, over time, some lenders emerge as more favourable to customers than others.

As a result of these changes which, in whatever form they might be applied, undoubtedly place a much greater onus on potential home buyers to prove that they are able to afford a mortgage loan, we are likely to see loans issued on a much more cautious basis by lenders. While this is not a bad thing, it may have an impact on the wider property market and inevitably it is first-time buyers (FTBs), who have, until recently, benefitted from schemes such as Help to Buy, who are most likely to be affected. Because the more stringent rules will require mortgage applicants to outline their ‘basic living costs’ – which are likely to be considerably higher for these buyers, who will be looking to purchase furniture and fittings, for example, for their
new home – FTBs are automatically placed at a relative disadvantage.

This will have a particularly dramatic effect
in London, where the average age of FTBs is
already older than in the rest of the country
and where daily living costs are, in general,
more expensive.

Additional delays

Although in principle the changes should not affect the conveyancing process per se, due to an increased probability that mortgage applications will decline or the approval process will be elongated, it is also likely that additional delays will be incurred as vendors will be less inclined to accept an offer until they have proof that the buyer’s mortgage has been approved.

This may mean we see an increase in the
number of transactions falling through at initial stages; although in the long term the risk of offers being withdrawn should hopefully decrease with in-depth assessments being carried out from
the outset.

For existing offers, conveyancers will need to be alive to the prospect that offers may get withdrawn between exchange and completion if there has been a material change, as the new rules are used to re-assess the applicant. This may mean that more conveyancers choose to exchange and complete on the same day in order to avoid the risk of this happening.

Where a reassessment is taking place due to a material change, considerable delays could be incurred while the lender collates the affordability information. If the client is under contract, this could result in completion dates being missed.

While there will undoubtedly be a period of adjustment while conveyancers and other parties involved in home-buying transactions acclimatise to the new mortgage application rules under the MMR, a more tempered approach to mortgage approvals is a positive development overall.

Schemes such as Help to Buy last year contributed to the wider revival of the UK housing market, however it is important that we have in place systems that ensure home buyers are aware of what they are committing to, especially if this is for the first time.

What we absolutely want to avoid is for ten years down the line, a whole generation of home buyers to find that they are unable to keep up with their mortgage loan repayments. This is the worst case scenario and one that these new rules will help to guard against. Under these, home buyers can secure a loan and buy a home confident in the knowledge that this is a realistic and affordable decision – an assurance, it could be argued, it is worth waiting a bit longer to receive. SJ

Kathryn Taylor is a spokesperson for the Conveyancing Association and managing partner at Gordon Brown Law Firm