How the New mortgage lending rules will affect your application.

Some may say that an epiphany has occurred in the mortgage market, a realisation that borrowers should be able to afford their mortgage when they take them out, and that mortgage lending criteria was not stringent enough, financial advisers did not drill down into applicants' finances, and that neither advisors nor applicants fully evaluated the consequences in interest rates rising.

The result of this epiphany is the introduction of new guidelines for lenders to follow.

We tend not to disagree with any of these statements, but have the new measures under the Mortgage Market Review gone too far and how will they impact the mortgage and property markets?

The New Process.

Under the new system applicants will undertake a comprehensive financial fact finding interview, this will be a detailed examination, by an adviser, of your finances. Your adviser will also undertake 'stress testing' ensuring that you understand the impact of future interest rate rises, and can afford them, even if the rates go up to 7%.

Many lenders have had affordability rules in place for some time, so some of this will not be new; I was following such rules back in the 80's and 90's when working for Nat West, now that was a time of scary interest rates!

The review also 'limits' the number of interest only mortgages, these rules apply from the 26th April 2014, but most lenders have been adopting the new guidelines in preparation for the changes - updating software , staff retraining etc.

So what's the problem?

Some critics have complained about the length of time the financial interview will take, some saying 2-3 hrs; there may also be a second interview to follow, the problem being that you may have to wait to get an interview as the process takes longer, and the danger with this is that it causes delays.

We are not sure if the length of the interview is a problem. Buying your home is a major purchase, possibly your biggest, so it needs the consideration, and our advice is to look to obtain a mortgage in principle as the very first step on your property-buying ladder.

The biggest question mark is how lenders will judge affordability. The old system looked at loans and credit reports making sure you had a good credit track record, where as the new system will be more comprehensive, looking at spending patterns, holidays, cars, social spending etc.

I would argue, through experience, that you cut your coat according to your cloth.

The new rules will treat spending as a constant, and lenders' interpretation of affordability will be of great interest.

Most lenders are concerned how the regulators will deal with them if they do not follow the true intentions of the rules; however my view is that it is inevitable that market forces will soon test the affordability guidelines.

So what should an Applicant do?

First advice is to act now, cut your spending, if your mortgage is going to cost £1000 make sure you are saving that each month or are showing that you can, and be aware of the 'stress test', if you are borrowing on a repayment mortgage - £200,000 at 5% over 25 years the cost will be £1169.18 per month, an increase in rates to 7% will take the payments to £1412.56.

Do a financial review yourself as soon as possible, detail all spending and categorise each item essential and non essential, the more preparation you can do the better it will be for you, it shows an awareness and responsibility which lenders will like.

Do some research; the mortgage market is always evolving, lenders change rates and fees all the time, be very careful about lenders that charge an upfront non-refundable application fee - paying a couple of hundred pounds to a lender only for them to say, 'no' will leave a very bad taste in your mouth.

Speak to a couple of independent advisors, who will be able to check the market for you, if you approach a lender direct, remember they will only offer their own product.

The new changes are a good thing; we must learn from the lessons of the past, i.e. irresponsible lending; only time will tell how these rules are adhered to, and how the regulators police the market.

1000's of people become homeless because they cannot afford their mortgage payments, 10's of thousands of home owners will find it hard if interest rates do increase substantially, whilst regulators and advisors tighten up on lending, as applicants we also have a responsibility for sensible borrowing.

How will this affect the property market?

We are going through a period of boom in the property market, the Bank of England have recently taken steps to slow the market down, the new lending rules will also have an impact on cooling the property market, but only time will tell how much the market will slow but, in the present climate, with property prices rising through a combination of overseas investment, supply and demand, and properties being purchased for rent, we don't feel the market will slow that much.

The truth is that we all need a home, if it's a rented property or owned, property prices will go up and will come down at times, as a home owner it's not an investment it's a place to live, being able to afford to pay the mortgage is crucial and the new rules are sensible and will help borrowers and lenders.