The Financial Conduct Authority (FCA), the mortgage regulator, has introduced tough new rules requiring mortgage lenders to thoroughly check that borrowers can afford repayments, both now and in the future before approving applications. To do this they will now need to delve into your personal life and obtain a clear picture of your income and outgoings. As a result, it is feared that many applications will now be declined with many potential borrowers simply failing to meet the strict new criteria.
Lenders will also look at how a rise in interest rates might affect your ability to keep up with your monthly repayments. All of this is to be dealt with during a three hour interview.
What type of questions will they ask?
All of your regular outgoings will be analysed in detail, such as gym and other memberships, insurance premiums, monthly loan repayments, phone bills, pension payments and all other similar commitments. The lenders will be assessing what your current liabilities are and how much more you can afford to pay out each month.
This means that you should be prepared to inform the lender how much do you spend on:
| Eating out | Socialising | Hotels |
| Alcohol | Cigarettes | TV and Internet subscriptions |
| Mobile phone | Gym memberships | Essential travel |
| Parking | Clothing and footwear | Haircuts |
| Personal grooming | Cleaning products | Dry cleaning |
| Pets | Dental care | Eye care |
| Childcare | Groceries | Non-essential travel |
You are also likely to be asked:
As a consequence home-buyers could find themselves turned down for a mortgage because it is considered that they are already overburdened financially each month.
Who will be affected?
All mortgage products, which are regulated by the FCA, now fall within the new rules. These are:
The FCA does not regulate buy to let mortgages so if you are planning to apply for one of these mortgages you will not be affected by the new rules.
How can I improve my chances of being approved?
Lenders will look back up to six months at your bank statements and therefore income and outgoings. They will be most interested in what your outgoings have been during the months leading up to your mortgage application. They will be looking at payments that you make on a regular basis where you have a commitment to carry on with the payments for a period of time in the future. So, if you have one-off payments that you have made in the months leading up to a mortgage application these should not count towards you.
So consider taking the following steps to maximise your chances of being accepted for a mortgage.
Pay down debt
Lenders will consider how much you owe on personal loans, credit cards and other types of debt when assessing your finances.
Reconsider your saving habits
Some lenders are treating regular savings such as a monthly direct debit into a personal pension as a financial commitment when assessing affordability.
Maximise your credit score
Make sure you are on the electoral roll and check your credit file for mistakes. Remember that as far as most lenders are concerned the information they get from a credit reference agency is gospel, even if you have evidence it is inaccurate. Make sure any problems are corrected before you apply for a mortgage.
Check affordability calculators
Most lenders now offer affordability calculators on their website. You can enter your income, spending and other personal details to get an idea of how much you could borrow.
A word of warning, these new rules have been put in place to prevent home-buyers from biting off more than they can chew financially. Therefore, if you do make cut-backs please be sure these are feasible over the long-term, as opposed to being a temporary measure to assist with your application.
For more information visit Dean’s free legal and consumer website.