The regulators are introducing tougher tests for home buyers based on affordability to prevent mistakes leading to the financial crisis.
New rules following the Mortgage Market Review (MMR) introduced by the Financial Conduct Authority (FCA) will impact first time buyers, home movers and switching remortgage buyers.
Previously the mortgage was based on multiples of income but the affordability test account of how you spend your income on household costs and luxuries such as eating out, childcare, mobile phone, holidays and many others.
New approach by lenders
From 26 April everyone applying for a mortgage must be tested to ensure they can afford the loan now and in the future which could result in thousands of applications being rejected.
Mortgage lenders are now responsible for assessing affordability for first time buyers, home movers and existing homeowners re-mortgaging their homes including an increase in the size of the loan and changing the term of the mortgage.
Anyone applying must provide three months of bank statements to show their expenditure and their ability to pay the mortgage today as well as when interest rates rise in the future.
Borrowing multiples may increase
In the past borrowing multiples were limited to four times earnings by lenders for a single application or two and a half times for a joint application.
Some homeowners may now be able to borrow more from a lender. For higher earners that can show they have low expenditure multiples may be as high as seven or eight times their earnings.
For example, one of the UK’s largest lenders Santander would offer a couple each earning £35,000 per year a mortgage of £329,500 or a 4.7 multiple if they had no children or after childcare costs a mortgage of £205,600 or a 2.9 multiple.
The equity release mortgage buyer is not subject to income multiples and can secure fixed rates typically from 5.9% upwards without any evidence of earnings, important for borrowers with only pension income.
The new MMR rules will mean borrowers will benefit from advice from mortgage brokers that can help them to put forward the best financial case by stripping out luxuries three months before making a mortgage application.
These rules do not apply to buy-to-let landlords as they must have a 25% deposit and show the rental income can exceed 125% of the mortgage interest.
What are your next steps?
Speak to our LCM mortgage advisers if you are planning to move home, buying your first home, remortgaging your existing home to a new cost effective mortgage deal or are a buy-to-let investor
Learn more by using the mortgage cost calculators, equity release calculator and property value tracker chart. Start with a free mortgage quote or call us and we can take your details.
For equity release buyers our London City Mortgage brokers can recommend lifetime mortgages allowing you to receive cash from your property to help maintain your standard of living as costs rise or pay university fees for grandchildren.
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