In April of this year, the Mortgage Market Review introduced a number of reforms that have helped to make the mortgage market work better for consumers and participants. This blog is aimed at helping you understand the new reforms, and what they mean for mortgages.
What Changes Did The Reforms Bring In?
- Customers now need to show lenders that they can afford the mortgage, and must provide evidence of their income.
- Customers can only borrow an interest-only mortgage, if they have a credible repayment strategy.
- Interactive sales (face to face or via telephone) must be advised, unless the customer is a mortgage professional
- Non-advised sales are not allowed
- Execution-only sales are allowed in certain circumstances
Why were these rules brought in?
Whilst the mortgage market has worked well for many people, there were others for whom it had been a source of financial distress. It also allowed for risky lending and borrowing to go largely unchecked throughout the boom period of 2005 to 2007.
The FCA therefore, carried out a review of the mortgage market, and how it is regulated and made the changes to strengthen the overall regulatory regime.
The changes allow the FCA to deal with firms who adopt high-risk strategies, and gives them powers to intervene when business models and strategies create risks for firms, consumers and the wider financial system.
So, what do these reforms mean to me?
It’s hoped that the new reforms will put an end to “self-cert” loans, where borrowers declared their income but did not have to certify it. This meant that people exaggerated their earnings so that they could borrow more.
Now, mortgages will have to be scrutinised by the provider, who will assess whether the customer can afford the loan in the long term, including buyers and those who are remortgaging their property.
Most borrowers will be required to take formal advice from the lender, a mortgage broker or a financial adviser. Some borrowers, those who know exactly what loan they want may not need to take advice when borrowing. Additionally, those with an annual income of more than £300,000 or assets worth more than £3m will also be able to take on a mortgage without taking advice.
What sort of questions will I be asked?
In order to show the lender that they can afford the mortgage, customers will undergo questions about their spending habits and lifestyle. This is to gauge whether or not the borrower can afford the mortgage. Self-employed and contract workers might have to face some of the toughest questions.
Questions may include details about your private life – such as whether you gamble, or how often a month you go out to socialise.
If you’re looking to get a mortgage on a property, we can put you in touch with a trusted mortgage advisor.