Mortgage Market Review: why finding a mortgage is set to get harder

New rules coming in now mean that finding a mortgage may get tougher.

Today (26th April), the Financial Conduct Authority introduces its stringent new regulatory system for mortgages, known as the Mortgage Market Review (MMR).

This is designed to stamp out risky lending practices and protect homeowners from taking on too much debt. Both laudable aims, but an overdose of MMR could have some nasty side-effects.

It is likely to lead to a surge in the number of people being turned down for a mortgage. And it will make the whole application process longer and more invasive for everybody.

Show them the money. Every penny

You may be astonished and irritated at the level of prying into your personal life and spending habits, as lenders decide whether you are fit and proper person to have a mortgage.

You will have to set out exactly how much you spend on childcare, or commuting, or clothes. Also child maintenance, student loans, pension contributions, energy bills, household insurance, life cover and school fees.

If you pay ground rent or a service charge on your property, they will want to know how much.

If you've been in your job less than two months, you must hand over your previous employer's details.

You will also have to produce a fistful of payslips to confirm any bonuses, overtime or commission. And provide documentary evidence of your deposit.

All the information you supply will be carefully matched against your credit reference agency data, to make sure you are telling the truth.

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Can you really afford that bhaji?

It gets worse. Lenders will demand to see recent bank statements, to check you are spending your money in an approved fashion.

There are already reports of lenders asking why applicants order so many takeaways, draw out large wedges of cash on a Friday night or flash their debit card so freely in nightclubs. That sort of behaviour simply isn't becoming in a homeowner.

There is an industry phrase for what lenders will be doing: "rigorous forensic data gathering". That makes it sound like an episode of CSI, with lenders picking over the bones of your life.

As lenders have shifted towards affordability criteria since the financial crisis, this kind of data gathering is already happening to a degree. But now you will get the third degree.

Get ready for stress testing

You may also be forced to take advice, either from a broker or lender, even if you're only doing a simple remortgage, or porting your existing mortgage to your new home, especially if you want to borrow a bit more cash.

This might involve two or three interviews, instead of one, dragging out the process.

Lenders must also subject your application to stress tests, to ensure you could still afford your repayments if interest rates increase.

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A list of losers

These well-intentioned changes could drag many borrowers on to the road to hell, by widening the gulf between mortgage winners and losers.

Many existing borrowers may find it more difficult to remortgage and become 'mortgage prisoners' who can't move onto another deal. Families are likely to be find it harder to get a mortgage than couples with no children, because of their higher spending commitments.

If you've moved home or job several times recently, or applied for several credit cards or personal loans, you will have some explaining to do.

Anybody with past credit problems will find it even harder to get a decent hearing. One unpaid bill could destroy your dream of buying a home.

Death by mortgage

Under MMR, self-certified mortgages will be banned altogether. So will fast-track mortgages, which sped up applications for low-risk borrowers. Income multiples will wither and die. Interest-only mortgages will be restricted to the select few who can demonstrate a credible repayment strategy.

Product innovation is expected to dwindle, as we move deeper and deeper into the 'Computer says no' nightmare.

Lenders may increasingly insist that applicants pay a booking fee upfront, which won't be refunded if they withdraw their application.

Slower, costlier mortgages

All this could happen any day now, as lenders put their new MMR procedures in place.

Industry insiders are warning of a massive upheaval, as brokers and lenders update their systems and processes, and battle teething problems such as IT failures and lack of staff training.

The chaos could drag on for months, brokers have warned. It could hit the housing market recovery.

In the longer run, the MMR may force up mortgage rates across the board, as lenders pass on their extra costs to borrowers. The demise of the Funding for Lending Scheme for residential mortgages, which gave lenders access to cheap finance, could accelerate this process.

Rates have already started rising. The average five-year fixed rate cost 3.92% in January. In February, it had crept up to 3.98%. Meanwhile two-year rates rose from 3.52% to 3.59%.

The halcyon days of low mortgage rates are coming to an end. It may be time to grab one while you still can. Read more in Fixed rate mortgage interest rates on the rise.

The big if...

If you're looking to buy or remortgage, don't delay your application. Get it in early.

You must also clear your debts, mind your spending, pay every bill on time, and prepare to hand over every last scrap of data on your life. If you don't provide satisfactory answers, or skip the odd question, your application will be thrown back in your face.

If you can do all that, then maybe, just maybe, you'll get a mortgage.

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This article has been updated since its original publication

More on mortgages:

Help to Buy mortgages explained

How to beat Stamp Duty

lovemoney Awards 2013: best mortgage provider

Seven reasons mortgage lenders turn you down


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