The Mortgage Market Review changes that were introduced last month marked the most significant shake up of mortgage regulation in the UK in some time.
The changes, which were overseen by the Financial Conduct Authority, have essentially been designed to focus on consumer protection and provide more safety nets and barriers than were in place before. Almost every aspect of the mortgage market is likely to be affected, from mortgage administration to applications. Below are some of the key changes being introduced.
Borrower advice is to be more detailed – firms are now required to ask more questions of a potential borrower to establish which mortgage product suits them the best. These questions must not be generic but based on individual needs and circumstances and are likely to necessitate longer – or even more numerous – interviews.
A clearer distinction between mortgages sold as ‘advised’ and on an ‘execution-only’ basis – most future mortgage sales and variations are likely to be on the former basis, which will require more staff training and qualification in order to be able to provide this advice as part of the process.
Remortgagers may also be affected – those who are remortgaging may now find that they are required to pass a new affordability test and to undergo an advised process in order to successfully remortgage.
Future affordability is now a key factor – as well as whether or not initial payments can be met, the changes now require future affordability to be taken into account too. Future changes in circumstances, such as redundancy and retirement, will also have to be taken into account when considering affordability and there is an ‘interest rate stress test’ that will test whether the affordability threshold would still be passed if interest rates on the mortgage loan were higher.
A buyer’s expenditure will now be more closely scrutinised – expenses and costs will be looked at in greater detail, including every day spending, credit card spending and repayments on other loans. Borrowers may also face more of an evidential burden when it comes to proving spending commitments and habits than was the case previously.
Interest only mortgages become niche – of course it’s still possible to obtain an interest only mortgage, however, this has now become something of a niche product. In order to obtain one a borrower must be able to show that they have a credible strategy for repaying not only the interest and fees on the mortgage but the actual loan itself too. Any costs related to opting for an interest only mortgage must also now be included in the affordability assessment.
The changes have been generally well received and most of those businesses dealing with mortgages – brokers as well as lenders – were ready for the implementation of the new rules when they arrived in April. Some lenders even announced their Mortgage Market Review rules in advance of the 26th April implementation date. Paul Smee, director general at the CML, said of the changes “we hope and expect the new rules will provide a robust and stable framework for the long term.”