14th July 2010
“Life On Mars” for mortgages?
Until 2007 tales of queuing up at the building society for a mortgage in 1970s, were just folk tales told by parents to kids who had never had mortgage credit so easy. Those days would never return, would they?
Yesterday the Financial Services Authority (FSA) announced plans to make it more difficult for borrowers to get a mortgage. If implemented, these changes will make mortgages more expensive for everyone. The self-employed, first-time buyers and those with a poor credit history will be worst hit.
A painful adjustment
Many people will justifiably argue mortgage market reform is long over due. The problem is that the adjustment to this brave new world will be painful for a generation of homeowners used to cheap mortgages and large loans.
Plan now
Many existing borrowers are relying on low interest rates now and hoping that when rates go back up the mortgage market will be back to its pre-Credit Crunch easy ways. It won’t. You need to plan for this now.
The FSA is now nanny
The FSA used to think if banks treated their customers fairly, customers would make sensible borrowing decisions. But many customers consciously borrowed too much, are only surviving because of low interest rates and can’t save enough for retirement. In future the FSA will act to save consumers from themselves.
It’s all about affordability
Despite some media reports, the FSA does not plan to ban high Loan-to-Value or high Loan-To-Income mortgages – as long as the borrower can show they can afford it.
Lenders will have to check the affordability and income of the applicants for ALL new mortgages (compared with only 57% now). The problem is the calculation will be more conservative than in the past, meaning you can borrow much less – especially those with a poor credit history.
What does this mean?
The extra work for the banks in checking affordability will mean more expensive mortgages for all borrowers.
It will be harder for many people to trade up. Many existing borrowers will be trapped in their current loan, as remortgaging will be more difficult.
Incomes will have to be independently verified – killing off self-certification and fast-track mortgages. This will make it almost impossible for anyone who is self-employed to get a mortgage without 3 year’s accounts.
People with a poor credit history will find getting a loan very tough.
First-time buyers will find it much harder to get a big enough loan to buy their first house than was the case before 2007.
The lenders will continue to squeeze mortgage brokers out of the market, making it even more difficult for borrowers to remortgage.
These changes will put a brake on house price rises over the long-term.
What should you do?
These and other changes mean it will remain difficult to get large mortgages. Also interest rates will go up again eventually. This will be a painful adjustment for the generation of new borrowers since the mid-1990s who are used to easy credit and ever-rising house prices.
You need to prepare for this now whilst you can:
• If you have any bad debts, pay them off. If not, make sure you don’t miss any bill payments.
• If you are planning on going self-employed, get your mortgage first.
• If you are coming to the end of an interest deal on your existing mortgage, accept that you may not be able to remortgage like you have in the past and plan for any increase in payments.
• If you have any spare cash, pay down any credit cards, unsecured loans, and then any existing mortgage. Don’t take on any more unsecured debt if you can avoid it.
• If you want to buy your first home, save like hell. You’ll need a bigger deposit or will have to wait longer.
• If you have to trade up, don’t stretch yourself financially if you can avoid it. If you do stretch yourself, accept that it won’t be feasible to remortgage for many years – so get a deal you know you’ll be able to afford.
It’s an ill wind that blows no good
In future everyone who gets a regulated mortgage can be reasonably confident they will be able to afford it. The scary fact is that many people have borrowed in the past without this reassurance. By borrowing less you will have more cash every month to save for retirement, or a something you think is more important like a holiday…
Important declaration
Page Russell Ltd does not advise on or arrange regulated mortgages. We can give generic advice and commentary and are happy to answer any general queries you may have. If you need specific advice on a regulated mortgage we can refer you to one of our Approved Expert mortgage brokers. This document does not recommend that you buy, redeem or vary any regulated mortgage contract. Your home may be possessed if you do not keep up the mortgage payments. Buy-to-let mortgages are not regulated by the Financial Services Authority.
