2:56am Sunday 20th April 2014
© Press Association 2014
People applying for a mortgage are facing tougher affordability checks which delve into their spending habits on outgoings ranging from childcare, travel and clothing to wine clubs and even a flutter on the horses.
The higher hurdles are being put in place as lenders gear up for new rules which come into force on Saturday under the Mortgage Market Review (MMR), which aim to prevent any return to irresponsible lending.
Experts are warning people that they may want to consider reining back on their spending several months before applying for a mortgage, as providers will want to sift through around three months of bank statements "with a fine tooth comb".
The new industry-wide rules mean mortgage providers have to take a much keener interest in an applicant's regular outgoings, which could also include what they spend on food, household bills, loans, credit cards, toiletries, hobbies and leisure activities, in order to weigh up whether or not they can afford their home loan.
The changes will not only affect buyers but people looking to remortgage. Applicants may find they have to provide more paperwork to back up what they are saying about how they can afford their lifestyle.
Providers will also have to make sure that a borrower could still afford to make their repayments if there was a rise in interest rates, by applying a "stress test".
They will also try to gaze further into the future to work out the impact of any life changes on the horizon, such as retirement.
Lenders have been anticipating the rules for some time, and although they do not formally kick in until April 26, brokers say they are already seeing their impact.
Ray Boulger, senior technical manager at mortgage adviser John Charcol, said the mortgage application process is becoming "much more forensic".
He said in one recent case a mortgage lender probed a £6-a-month milk bill on someone's financial records and in another, a bet someone had paid for on their card prompted questions about whether the person was a habitual gambler.
Mr Boulger said lenders tend to use official consumer spending figures as a benchmark when working out what people can afford and anyone who nudges over these is likely to see the amount of money they are offered for a mortgage reduced.
Jonathan Harris, director of mortgage broker Anderson Harris, said that people who are a little stretched financially should perhaps consider ditching things like takeaways in favour of a weekly supermarket shop.
He said anything from pet or dental insurance to direct debits made to wine companies could now be seen as "commitments" which will be deducted from the total amount a provider is willing to lend.
Mr Harris said: "The main difference is that previously an applicant declared their outgoings and the lender took a cursory look at bank statements; now the bank is likely to go through them with a fine tooth comb.
"Our advice is to cut back for three months before applying for a mortgage: pay off debts and simply spend less.
"In the past, borrowers reined back their spending once they had a mortgage and had to pay it each month; now you should act as though you already have that commitment in place and reduce your spending accordingly."
The Council of Mortgage Lenders (CML) has said that borrowers will find that procedures for giving advice will be more detailed. It has been estimated that an advised sale could take up to two hours or longer to complete.
The CML has said the "overwhelming majority" of mortgage sales will be advised and some lenders and most brokers will only offer advised sales.
The rules could see more people turning to brokers, who would argue that they can help steer people through some of the new bureaucracy more quickly.
Interest-only mortgages, which allow borrowers to pay off the capital only when the mortgage term ends, will still be offered. But they will be considered a "niche" product and customers will have to show they have a credible strategy in place to repay the loan when it comes to an end.
Last summer, City regulator the Financial Conduct Authority (FCA) issued a "wake up call" to interest-only mortgage holders amid fears that up to 1.3 million people do not have enough cash to pay their loans back. This type of mortgage has become much more thin on the ground in recent years.
The new rules come into force amid concerns that surging house prices are making people feel under pressure to stretch themselves financially.
Figures released by the Office for National Statistics (ONS) last week showed that the average price paid by a first-time buyer for a home was 10.5% higher in February than it was a year earlier, at £192,000 typically.
Mr Harris said that it will "still be reasonable" for people who can show they are not over-stretched to be able to borrow between 3.5 and 5.5 times their income.
But he said that in some cases where a person's spending habits are not quite up to what a particular lender is looking for, that borrower might have to settle for a different deal with a slightly worse rate.
Mr Harris said: "You need to be aware that things are more stringent. It's just about being able to afford your lifestyle from your income."
He said that for those who can demonstrate that they can afford it: "Liking a flutter on the horses and fine restaurants is fine."
Martin Wheatley, chief executive of the FCA, has said the changes will "hard-wire common sense into mortgage lending", adding that: "In the past too many people got a mortgage by simply telling their lender they would have no problem repaying their debt, and that was that."
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