Homebuyers face tougher scrutiny of household bills and childcare costs
|
Version 0 of 1. Homebuyers are to face tough new affordability tests which will take account of every aspect of household spending, including childcare and takeaway meals, as part of an effort by City regulators to avoid the lending mistakes made in the run-up to the financial crisis. From 26 April anyone applying for a mortgage will have to supply three months of bank statements that will be scrutinised line by line to check that the borrower can repay the loan at today's interest rates and if borrowing costs rise. But there are fears that the affordability tests will be sidestepped as mortgage brokers advise potential buyers to strip all luxuries out of their spending for three months before applying for a loan. People whose salaries are high and can show they live frugally could borrow seven or even eight times their income, brokers claim. The Mortgage Market Review being introduced by the Financial Conduct Authority requires lenders to send detailed questionnaires to customers. Few banks or building societies have revealed their questions, although one version circulating in the industry asks how much is spent on dry cleaning, glasses, pets, grooming, dentistry and parking, as well as entertainment, restaurants, furniture, holidays, and white goods. Borrowers with children could be particularly hard hit. Until now, some banks have ignored childcare costs in their loan calculations, but are expected to include them from the end of this month. Jonathan Harris, director of mortgage broker Anderson Harris, said those with a good financial record – for example, a high credit score, relatively few bills and other commitments, and a decent surplus of funds each month which is put into savings or left in a bank account – could be able to borrow up to five times their salary. This applies to couples as well as single applicants. A single person earning £35,000 a year who meets the requirements may be able to borrow up to £175,000, while a couple each earning that amount could qualify for as much as £350,000. Some brokers believe the emphasis on affordability rather than rigid income multiples could pave the way for even bigger mortgages. Rob Killeen, of brokers Capital Fortune, said someone earning £100,000 a year who has no dependants and lives a simple lifestyle – taking no holidays, cycling to work and turning the heating off as much as possible – "could be looking potentially at £700,000 to £800,000". However, he added: "In reality, there are very few people who operate like that." This week Santander, one of the UK's biggest mortgage lenders, tightened up its affordability tests. It currently indicates that a couple each earning £35,000 a year would be able to borrow as much as £329,500 if they have no children, but this falls to £205,600 once childcare costs are added. 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." However, brokers are warning of the perils of trying to create a picture of spending that is dramatically different to reality; one said that was "not far off [the old offence of] obtaining a pecuniary advantage by deception". The FCA has not laid down specific interest rates to 'stress test' borrowers against future rises, but what is emerging is that banks will only grant loans if the borrower can still afford the mortgage on an interest rate 3-4% higher than today. Woolwich, for example, is checking that borrowers can afford loans at an interest rate of 6.74%. The FCA is suggesting lenders use the so-called 'forward sterling rate' published on the Bank of England's websited, which this week was suggesting that interest rates may rise by 3.19% over the next five years. The new affordability regime comes amid growing evidence that the house price boom in London is spreading. Figures this week revealed that Britain's property market posted its highest sales level in more than six years, prompting a warning by the Royal Institution of Chartered Surveyors that rising prices will put home ownership out of reach of many. However, as lenders revise their systems to become 'MMR-ready' for April 26, there is speculation that lending volumes will fall. Yesterday e.surv, a group of 380 property surveyors, said house purchase approvals fells by 7% between February and March, with lenders testing out their new affordability systems. "New MMR regulations have played a part in the lending slowdown. Lenders are trialling their MMR ready systems in the run up to the full roll-out of regulation at the end of April. They are tightening up affordability checks, training staff and putting in place lengthier advisory processes. House purchase lending has dipped as a result," said Richard Sexton of e.surv. |