Over the past few months a number of property and economic experts have been vocalising their opinions on how the housing crisis can be solved. Currently, there is a much higher amount of demand for housing than there is supply, which has ultimately led to house prices increasing at a rapid rate. One of the causes of this surge in demand is the government’s Help to Buy scheme which enables individuals to apply for a mortgage with a deposit of as little as five per cent.
In order to rectify the situation the government are funding a number of construction projects across the UK, however many are facing issues such as a lack of readily available building supplies and skilled labour. This is why many people were surprised to hear that the Help to Buy scheme is being extended until 2020, as even though it has brought activity to the property and private rental markets it’s ultimately unsustainable and could cause another housing bubble.
However, we could soon see a drop in the amount of people being approved mortgages as the Financial Conduct Authority (FCA) has drawn up a new set of rules called the Mortgage Market Review (MMR) which states that from tomorrow onwards applicants for mortgages will need to be quizzed about their lifestyles as well as regular outgoings. Talking to the BBC, Martin Wheatley, chief executive of the FCA, said: “The core principle is a very sensible one – lend to people what they can afford to repay.
“We’ve come out of a period, particularly in 2008-09, when there was no attempt to verify people’s ability to pay, and we’ve ended up with lots of payment problems, lots of people in mortgages that are problematic for them, and if we had a different interest rate environment we’d see a lot of foreclosures.” By discussing with applicants their lifestyles and outgoings such as subscriptions and childcare fees lenders will have a better idea of how well they could manage their mortgage repayments even during times of economic difficulty.
This scheme was first formulated during the financial crisis, however it could prove extremely beneficial in the near future, especially as the Bank of England are planning on increasing their interest rates over the next few years. This plan has understandably made those on lower incomes concerned that they will no longer have mortgage applications accepted, however the Building Societies Association (BSA) assured that this was not the case.
Paul Broadhead, head of mortgage policy at the BSA, added: “It is understandable that people are concerned about the changes to the mortgage application process, however it is vital that this new regime does not dent consumer confidence or sentiment in the housing market. It is highly unlikely that a single purchase or category of expenditure will make the difference between yes or no decisions.
“The Mortgage Market Review was introduced in order to ensure that a common sense approach to mortgage lending is applied by all lenders and that people are not borrowing more than they can afford to pay. A number of building societies implemented the process early and have been lending this way, without problems, for a number of weeks, in fact, the common sense approach has been taken for years.”
However, there are some that feel that the new rules are unnecessary, such as Ray Boulger from mortgage advisers John Charcol, who said: “When it gets down to asking for detail on non-essential expenditure, which we know in practice that people tend to cut back on if they need to, that’s where I think some lenders are going too far – but it does vary considerably from lender to lender.” It is also not clear how the new rules will affect buy to let mortgage applications, as landlords tend to have more outgoings than individual applicants such as landlord insurance and letting agent fees.
In order to increase the chances of having mortgage applications accepted, Adrian Anderson, director of mortgage broker Anderson Harris, advised to cut down on spending a few months before approaching lenders. He added: “Cut back for three months before applying for a mortgage: pay off debts and simply spend less. In the past, borrowers reined back their spending once they had a mortgage and had to pay it each month; now you should act as though you already have that commitment in place and reduce your spending accordingly.”