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Mortgage Market Review – Interview with a Financial Adviser

16/06/2014

Have you been looking to buy a house recently?

Well, you might have noticed some big changes to the way you’re expected to apply for a mortgage, with the main reason being something called the ‘Mortgage Market Review’ (commonly known as the MMR).

One of the things you might have been made aware of is that it might have become a little bit more challenging to successfully apply for a mortgage because of the MMR (or some people might have told you that it will be!).

As a result of this, we have received a lot of questions about the Mortgage Market Review from individuals looking to apply for a mortgage, some of which are fearful that it might affect their ability to buy a home.

So, to answer your questions, we’ve interviewed one of our very own professionally qualified financial advisers, Andrew Gurton.

Interview:



financialAdvice.co.uk (FA):



Hi Andrew.



Andrew Gurton (AG):


Hello.



FA:



So, as we’ve been getting a lot of questions about the MMR recently from individuals looking to buy a house, we thought it might be a good idea to get a qualified financial adviser to answer some of these questions in order to give hopeful mortgage applicants a foundation to build their mortgage application on.



AG:



Yes, that’s right, I’ve spoken to a few people who are either unsure on what the new rules are or are just unaware of the rules in general, especially when it comes to first time buyers!



FA:



A lot has been mentioned in the media about the MMR over the last few months, and it appears to have affected peoples mortgage applications quite significantly. However, many people are still unsure what the MMR actually is - So, to get things started, could you explain what the MMR is in a nutshell?



AG:



Basically, the MMR was a review of the way the mortgage market operates in terms of how lenders such as banks and building societies decide how much money they’re prepared to lend to certain people.

To put it simply, Banks and Building Societies now have tougher rules on how much they’re allowed to lend to certain people and now have to ‘stress test’ an applicants finances based on various factors, ranging from how much a person earns to how much they spend.



FA:



So you’re saying that before being approved for a mortgage, people will need to pass a financial ‘stress test’, but what exactly is this ‘stress test’?



AG:



The ‘stress test’ is just an assessment of a persons finances to make sure they can afford the mortgage repayments in more difficult conditions – mainly if interest rates were to be increased.

After completing the test, a bank will then be able to see if a person would be able afford the mortgage repayments in more difficult times – essentially protecting the bank and the mortgage applicant from getting themselves into trouble.

The test itself consists of an assessment of a number of things which include both an applicants income, as well as their expenditure – so an applicant will have to bring in details of their finances for the last three months!



FA:



So people will have to provide details of finances, but what exactly will prospective mortgage applicants have to prepare?



AG:



Before the Review, most lenders would have looked at just the key information such as a regular income, credit commitments, outstanding mortgage balances, personal loans and hire purchase agreements.

However, now they also take in to account financial commitments such as child-care, school fees, additional costs for financial dependants, student loans, regular travel costs and even how much you spend on your groceries!

So, it is important that when applying for a mortgage you can provide details of your spending habits.

For a full list, there’s actually a blog on financialadvice.co.uk with a check list of what you might need to prepare before hand - Are you prepared for the mortgage market review.



FA:



Ok so that makes sense, but why have they actually brought in these new rules?



AG:



Essentially, the rules have been introduced to reduce the risk of another housing market crash!

By the height of the market in 2007, the mortgage market had worked well for many, but caused severe hardship for others, largely due to irresponsible lending to people who could not afford such large mortgages.

The ‘Mortgage Market Review’ is there to ensure that there is continued access to mortgages for the majority of customers who can afford it, while preventing the poor practices of the past.



FA:



So they’re designed to protect us, but does this mean people won’t be able to buy the house they want anymore?



AG:



No, not at all. The review is there to ensure that a prospective mortgage applicant can afford the mortgage repayments now and in the future. This means that lenders will factor in potential interest rises in the future, as well as looking at on-going financial commitments to ensure that the applicant can afford the mortgage payments.



FA:



What about landlords who invest in buy-to-let properties. Will they have to pass the ‘stress test’?



AG:



No, the way buy to let mortgages are assessed has generally remained the same. As a guide, let properties are treated as self-financing where the rent received is at least 125% of the current mortgage payments.



FA:



And what about people who already have a mortgage? Are they going to be affected?



AG:



No, however it may affect them when they decide to move. With the changes in mortgage lending rules, they may find that the amount that they can borrow post-mortgage review is less than before the new guidelines were introduced.

Many mortgage holders believe that because their mortgage is ‘portable’, so they can automatically just move in to the next property. In essence, their mortgage provider will re-assess their ability to make the mortgage payment based on the new lending rules, so it could mean that a mortgage that has been paid for many years without any issues could be deemed by the lender as unaffordable on the new property.



FA:



So, if somebody is looking to apply for a mortgage – what should be the next thing that they do?



AG:



It is important for any mortgage applicants to organise the details of their finances for the last three months.

However, when looking for the best mortgage deal and how to approach this, it is always a good idea to contact a financial adviser, as they will be able to take you thorough the process step-by-step as well as find the best deal for your individual circumstances.



Summary



So, in a nutshell – the Mortgage Market Review is a set of rules which means lenders such as banks and building societies have to asses an individuals finances in depth before they are able to approve a mortgage.

The reasoning behind it is to protect both the potential homeowner and the bank from entering into a financial contract that cannot be fulfilled.

Whilst it may lead to some people being rejected for a mortgage they might have been approved for before hand, this is actually a good thing, as the likely hood is it will stop people from having their homes repossessed in the future.

For more information about the Mortgage Market Review in general, try reading "Are you prepared for the mortgage market review".

If you are unsure about how to progress with applying for a mortgage, it is always a good idea to get professional financial advice, which you can get by calling 0800 092 1245 of by asking a question online.



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