How Has Mortgage Lending Changed?

Lender confidence in the Buy-to-Let sector is on the up as the number of Buy-to-Let mortgage products now available is increasing all the time. This, despite more legislation as well as changes to landlord taxation rules. Irresponsible mortgage lending was largely blamed for the financial crash in the late ‘noughties’ and, not surprisingly, lenders were afraid to show their faces for a while!

A Mortgage Market Review (MMR) took place in 2014 which led to unprecedented changes in lending criteria as lenders were determined to avoid a repeat of the previous financial crisis.

In these blogs, we are always banging on about how resilient the property market is and always has been over time, especially the property investment market.  Tenant demand for rented properties continues to outstrip supply and this will continue.

Clare Eaton, Mortgage and Protection Adviser at Mortgage and Finance Arena gives her views on the changes.

 One of the most common questions I’m asked is “Can I borrow four and a half times my income”?

The urban myths still abound regarding mortgages and the change in regulation that occurred in April 2015.

“What’s changed ?” I hear you cry…

The main driver was all to do with more responsible lending and to ensure lending was more affordable and that the mortgage market for the future is sustainable and flexible.

One of the introduced measures was to ensure lenders fully assess affordability for clients, reviewing their income and expenditure and for a client to only be able to borrow what proves to be affordable and income must be verified. This meant an end to “self-certification” mortgages.

The proof of income must be available from an independent source, so documents such as payslips, signed accounts, tax overviews and computations, bank statements or a combination of these.

Affordability checking has been bought into play and this is usually based on a capital repayment basis over a 25-year term, even if an interest only mortgage is being taken or the actual term is longer.

Affordability checks also apply to buy to let mortgages which use the amount of rent a property is deemed to be valued at to calculate the potential maximum mortgage amount.“Stress tests” are also applied to ensure the mortgage isn’t just affordable now, but also should rates increase in the future. Those at the highest risk of arrears and/or repossession may be subject to a tighter stress test.

Does every lender take the same stance? No, they don’t. The new regulations have been implemented by each lender, but they have also considered the markets in which they wish to operate and the level of risk they are happy to take. Some are happy to be more fluid to meet different demands and this can be dependent on the size of the lender.

Prior to the regulation change, almost half of all households where the property was mortgaged, either had no money left or were in a shortfall once the mortgage and living costs were deducted. Part of the job of your mortgage adviser is now to go through a detailed budget planner and establish what your outgoings are and of those, which you could no longer need to pay and which you would have to keep paying. This is one of the reasons why credit checks are performed to establish the level of debt currently held, along with how much the monthly payments are the client’s historical performance in repaying them.

This is where your broker kicks in, to find the right lender encompassing all your individual needs. 

At the end of the day, lenders need to lend money. and are coming up with different ways of doing so. In the Buy-to-Let arena, deals are available to buy properties in a limited company, for example. Landlords with four or more properties are now subject to different criteria.

Borrowing money is now more ‘individual’ than it has ever been and a deal for one person may not suit another. It is vital, therefore, that proper advice is taken if you are thinking of either expanding your portfolio or starting off in property investment. Brokers are more important then ever!

If you’d like and help or advice on any aspect of borrowing, then speak to Clare on 07841 004738 or 01332 300300.