April 1st, 2014
The long awaited publication of the Financial Conduct Authority’s Mortgage Market Review takes place today, with the focus squarely on all lenders to refine and improve the processes used to assess the feasibility of any new loan. The aim for the FCA is to tighter regulate the financial sector, which was seen to play a significant role in the deterioration of the economy in the UK during the credit crisis.
The crux of the review will be to reign in previous and current practices, by asking lenders to refine their methods of underwriting to ascertain whether a mortgage is suitable for all applicants, both now and in the future. Currently, the emphasis for initially checking affordability has been to focus on the use of income multipliers to confirm that a new loan is within a 'contractors' reach. However, MMR sets out clearer guidelines for a lender, with the focus now geared towards the assessment of income against outgoings, and a requirement for a lender to look past any initial tie-in periods with a view to affordability being evident over the long term.
Some experts within the market have suggested that the changes could lead to larger mortgage loans achieving approval in some cases. The head of mortgage policy for the Building Society Association, Paul Broadhead, said: ‘There is a shift to affordability among all building societies. They will continue to communicate through the use of income multiples, so intermediaries and borrowers know ballpark figures, but in terms of actual underwriting it will be affordability. It means if you live a fairly prudent lifestyle then it could lead to more generous loan sizes.’
While this may sound promising if you are a contractor looking for a mortgage, a note of caution should be headed, as the FCA are determined that the rapidly recovering market does not slip the noose of control, and return to the riskier times seen pre-credit crunch. The FCA has confirmed that in the 3rd quarter of 2014, they will look to review which groups lenders look to lend to, with a particular focus on the way that perceived ‘higher-risk households’ are dealt with.
Within a business plan document attached to the review, the FCA confirmed that: ‘MMR will help to limit unaffordable lending practices, but we do not know how effective our rules will be when the market is growing. In a rapidly growing market, over-confidence in future price growth could lead firms to gradually loosen underwriting standards to maintain a share of the growing market.’
After the initial impact of MMR has bedded in, the FCA plans to review practices again in 12 months, to determine whether the rules are being adhered to and to monitor any attempts to flout the new guidelines. Particular attention is already being given to attempts made by borrowers and brokers looking to secure a buy to let mortgage in attempts to avoid the stricter affordability checks being introduced for a residential loan.
The reality is that mortgage processing times will be affected across the market, and all contractors should be aware that securing mortgage finance may now take longer than previously recorded. Simon Butler, from Contractor Mortgages Made Easy said: ‘Recently, it has not been unusual to see a mortgage offer provided inside 3-4 weeks, but lenders will now require far longer for the review of an individual case under the new guidelines. It would be advisable to remember this, as processing times are likely to impact buying timescales, at least until lenders formulate efficient practices to cope with the new rules.’
Article By: Simon Butler, Senior Mortgage Consultant at Contractor Mortgages Made Easy
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