Tough new mortgage rules are expected to cut the number of buyers enough to cause the housing market to stall over the summer, UK property experts have warned.
The new rules, introduced by regulators under the Mortgage Market Review (MMR), mean that borrowers will now face intrusive checks on their income and spending habits. Lenders are also testing whether borrowers are able to cope with increased repayments in the case of rising interest rates. Consequently, many new buyers and even existing borrowers wishing to remortgage are expected to have their applications rejected.
The Government’s controversial Help to Buy scheme has been criticised by some for increasing the demand for properties and pushing up prices, allowing buyers with as little as a 5% deposit to access mortgages. Whatever the cause, the latest figures from the Office for National Statistics report that the average UK house price rose to £253,000 in February, up 9.1% over the previous 12 months, with most regions seeing strong year-on-year growth in property prices. In England, prices are now higher than the pre-financial crisis peak of January 2008, with London seeing the largest growth: the average home in the capital now costs £458,000, up 17.7% over the year to February.
Under the new rules, lenders will be responsible for assessing whether buyers can afford a loan, regardless of their deposit. Consequently, lenders have developed affordability questionnaires that ask what some might consider intrusive questions, including whether a borrower gambles, has ever taken a payday loan, regularly eats out or has pets or any expensive hobbies. Some are going further, asking how much applicants spend on haircuts, cleaning products, eye-care, and parking. In fact, many go as far as to ask whether borrowers are planning any major life changes that could impact on their income such as starting a family or becoming self-employed.
Lenders are also applying more rigorous stress tests to ensure borrowers will be able to afford their loan when interest rates rise, with the particularly cautious assuming rates will reach 6-7% in five years’ time. Such an increase would require borrowers to have a considerable cushion in their disposable income to show they will be able to meet their repayments in the future.
And it’s not just new borrowers who will face the tough new tests. Existing customers who want to remortgage or move their loan to a new property are likely to be caught out and could find they no longer qualify. Although many mortgages were sold with assurances that they could be moved – or ported – to a new property midway through the loan, and in spite of new MMR rules stating that existing borrowers will only need to be put through the new affordability requirements if they want make changes such as increase their borrowing or change the length of their loan, some lenders will be applying the tests to people who simply want to move house.
Problems are likely to arise because many existing borrowers would not qualify for their mortgage if they were reassessed under the tough new affordability tests, even if their income had improved or they were moving to a cheaper property. These borrowers could be the next group of “mortgage prisoners”. Many are likely to be told they cannot afford their lender’s most competitively priced loans, and forced onto the expensive standard variable rate.
These tough new mortgage affordability tests could be in danger of killing off the boom in UK property prices as lenders reject thousands of borrowers who would previously have been accepted. Both executives within the lending industry and economists alike, have warned that the impact of the new rules, devised and enforced by the new City regulator, the Financial Conduct Authority, could be enough to strangle a nationwide recovery in the property market. Figures published yesterday by the British Bankers’ Association showed mortgage approvals have already started to fall back, reaching a four-month low in March