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New mortgage lending rules

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The government has been tinkering with legislation again. This time in relation to new mortgage lending rules. It is a further attempt to prevent another wholesale collapse of the housing market, and simultaneously help homeowners make responsible decisions about debt. The new rules came into force on 26th April this year. Here is a simple guide to what they mean for you.

A Bit of Background

In the early-mid 2000s the UK housing market was booming. Sales were coming thick and fast, and to fuel this frenzy lenders got a little gung-ho with their lending criteria. At its peak, some lenders sought no more than a vigorous nod, and a mumbled assurance of ability to make repayments from prospective homeowners before dishing out a mortgage. Many didn’t even require a deposit, and some irresponsible lenders even added loans on top, and allowed minimum interest only payments.new mortgage lending rules

When the inevitable crash came these lending habits left many homeowners in negative equity. The problems were compounded as the economy sank into an abyss-like recession that left many unemployed and unable to make even minimum repayments in their loans. It wasn’t pretty. So politicians put their heads together and reinvented new mortgage lending rules.

New Mortgage Lending Rules

The new rules (after you sift through the wordy-gumpf that accompanies any new legislation) are actually quite straightforward. They amount to a full affordability check on all new mortgage applications. In practice this means that lenders are now obliged to dig deep into the current financial circumstances of applicants, via a list of probing questions.

What Will I be Asked?

Lenders are primarily interested in how much spare cash you have in your monthly budget. This means that applicants will be questioned on any regular payments, and other monthly outgoings. Where previously this may have been limited to other loan repayments, lenders will now also be interested in things like gym subscriptions, regular travel payments, childcare costs, gambling and personal care costs such as haircuts and manicures. Borrowers will also be obliged to share any knowledge of future changes to their financial circumstances, including plans to start or add to a family, or upcoming reductions in working hours.

Documentary evidence of income and outgoings will typically be requested, so clearing any regular but unused payments from your bank statements (such as the gym subscription you never use) is a wise move. Lenders must also apply a ‘stress test’, which makes predictions about the ability of a homeowner to make repayments in the event that interest rates rise. It may no longer be possible to stretch yourself to the borrowing limit, in order to protect you from future rate rises. With rates remaining at record-lows for the time being, this is a wise move – who knows when they will rise, and by how much?

The Implications

The new rules will effectively lengthen the mortgage application process, meaning that it could take longer for applications to be approved, and for money to be released. For some homeowners the implications are more far-reaching. Loan amounts that were previously within reach may now not be attainable. Applications may be refused altogether, or a smaller-than-requested-amount only may be approved. While this may be annoying for first-time buyers, it could be devastating for those seeking to remortgage. It may make such applications impossible, leaving those with existing mortgages unable to benefit from fresh fixed rate or sub-variable rate deals.new mortgage lending rules

Ultimately the new rules are designed to protect both lenders and homeowners, but as with any legislation the rules cannot account for all individual circumstances and some borrowers will inevitably suffer as a result. It is hoped that the new rules will help customers to become more aware of their financial debt commitments, and prevent them from falling into a catastrophic debt-cycle. Of course if lenders had been more responsible in the first place … but then we are all responsible for our own actions too.

So let’s embrace the new rules (we have no choice!) and seek to create a life where we live within our means most of the time. The reduced stress this will deliver has to be worth a little pain, right?

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About Cally Worden

About Cally Worden

Seasoned freelance writer Cally Worden lives with her family and dog in a quiet corner of rural France. A love of the outdoors, and a fascination with her children's ability to view life with fresh eyes provide the inspiration for much of her work. Cally writes regularly for various websites and UK print publications on subjects as diverse as parenting, travel, lifestyle, and business, and anything that makes her smile.

Website: Cally Worden

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