Contractors will face increasingly intrusive questions around their personal spending from lenders if they apply for a mortgage. Strict new mortgage rules around affordability assessment for borrowers come into force on 26th April, with many banks implementing the guidelines early.
Some lenders have already warned that mortgage applications will take longer to assess, and there will be more declined applications by banks on the basis of unaffordable loans following assessment of how and where disposable income is deployed.
The new rules are predicted to inflict less harm on the outcome of contractor mortgage applications, as there tends to be a much higher disposable income that is available for the ‘stress-testing’ that banks will apply. However, it is inevitable that delays will occur as there will be more of a burden on banks to justify their lending.
The traditional model that lenders have used to assess affordability has included aspects of mandatory expenditure, such as food, utility bills, council tax and ongoing debts. The new model that has been imposed upon the banks forces them to include assessment of clothing costs, household goods (furniture, appliances, repairs), and even basic recreation costs. The extent of potentially ‘discretionary’ spending that will be used has caused concern to many would-be borrowers who are not contractors.
Paul Winter, head of Ipswich Building Society, has stated that the UK housing market will be the largest casualty if more applications are declined as a result of the incoming Mortgage Market Review (MMR). Winter estimates that up to 30% of all mortgages that are approved today, may be deemed unaffordable under the new MMR rules.
“There is likely to be a shortage of finance available in April, May and June, which will bring a halt to the market at a time when it should be kicking off in earnest,” stated Mr Winter.
This view is echoed by the Head of Intermediary Lending at Nationwide, the UK’s largest building society. Ian Wilson echoed Mr Winter’s views, although with less long-term concern for the housing market recovery.
“It’s possible that some clients who would qualify for a mortgage now, may struggle after the implementation of MMR, but the mortgage market will grow again in 2014. We may however see a change in the usual seasonality with a slight slowdown in lending through the implementation.”
Simon Butler, Senior Mortgage Consultant at Contractor Mortgages Made Easy, advises contractors that they have nothing to fear, but to avoid typical High Street and non-specialist broker routes.
“If you want to ensure you don’t fall foul of stricter affordability assessment by banks as a contractor, it is important that the bank appreciates your contractor status and doesn’t end up ignoring a large part of your income. Most banks will treat you as employed or self-employed, with nothing in between to recognise contractors. Specialist underwriting via the correct route will ensure that MMR doesn’t penalise you as a contractor.”
Article By: Taj Kang, Business Development Director at Contractor Mortgages Made Easy
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