The Bank of England has held the base rate at 0.5% this lunchtime, as the mortgage industry in the UK approaches the most fundamental changes since the onset of the credit crisis in late 2007. This is on the back of revised predictions for a base rate increase in the second half of 2014, rather than next year.
The UK regulator of financial services, the Financial Conduct Authority, will implement the largest raft of new rules around responsible lending on 26th April since self-certified mortgages were banned in 2008. The new changes are seen as a positive intervention to avoid borrowers taking on loans that they may not be able to afford in the future, but there will be short-term pain for borrowers as the new rules bed in.
New ‘stress-testing’ procedures imposed on lenders will require them to factor in future increases in rates when calculating affordability, with a greater burden on borrowers who have dependent children and ongoing commitments to prove they will have enough disposable income to meet higher mortgage payments alongside existing commitments.
The new regulations will launch in a mortgage industry that is rapidly moving away from the record-low rates that have been available since last year, with fixed rates in particular edging upwards on a regular basis in 2014. Government initiatives, like the Funding for Lending Scheme, designed to stimulate lending by providing cheap money for banks to lend to mortgage borrowers, came to an end this year. Industry experts blame the end of this particular scheme for the recent upward trend in rates.
Rachel Springall, spokesperson for leading independent comparison firm Moneyfacts, states that the recent trend in increasing fixed rates was inevitable.
“The market is beginning to change already. People have got used to these things (low rates) and expect them to be around forever. That was never going to be the case.”
This news has been compounded by revised predictions from reputable sources about a base rate increase looking more likely in 2014 rather than 2015. This started with the Governor of the Bank of England, Mark Carney, refusing to rule out a pre-election base-rate hike. Former Bank of England committee member, Andrew Sentance, has taken this one step further in the past few days.
“The Bank of England should have thought about moving them before now and the expectation when rates fell to 0.5 per cent was that they would only remain that low for a year to 18 months before climbing back to 3-4 per cent, but that has not happened.”
Andy McBride, Business Development Director at Contractor Mortgages Made Easy, looks at the impact for contractors looking for a mortgage in 2014.
“There is no doubt that the new rules will mean delays in processing new applications, as lenders have to scrutinise future affordability in far more detail. A limited company contractor using their trading accounts to prove earnings may have a problem, as salary and dividends are usually kept at a tax efficient level, and is not an accurate reflection of overall earnings.”
“Thankfully, our bespoke underwriting for contractors via the contract has remained intact following the new regulations, and contractors should be able to satisfy lenders around future affordability via this process.”
Article By: Taj Kang, Business Development Director at Contractor Mortgages Made Easy
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