What the Mortgage Market Review will mean for people with interest only mortgages on their home
The mortgage market review began in 2009 after we experienced the financial difficulties the mortgage market had caused for many people. The regulations previously in place had not proved effective in limiting high risk lending.
On 26th April this year, changes will be coming into effect which will ensure mortgages continue to be available to the majority. These guidelines should prevent a return of previous issues surrounding risky lending. With MMR close to its start, we are going to provide a series of articles over the next month that will explain some of the main issues.
Do you have interest only mortgages on your home?
Many of the coming changes are relating to interest only mortgages. If you have one already on your home, are approaching the end of your fixed term, or wish to change your mortgage product, you can expect your initial conversation about transferring your mortgage to last approximately 45 minutes, twice as long as previously expected.
You will need to demonstrate that you will have sufficient means to repay your borrowing at the end of your term, if you wish to remain on an interest only product. The intention to sell your home and downsize prior to the end of the mortgage term is no longer going to be considered acceptable as a means of repayment.
To be left in a position where you have reached the end of your mortgage term and lose your home will be bad press for lenders. After the events in recent years, this is something they wish to avoid at all cost. Should you not have any repayment method in place or other property to sell, you will be required to switch your borrowing to a repayment mortgage. If this is not affordable, the remaining term will be extended and the maximum proportion (which is affordable to do so) will be switched to a repayment basis and the remaining, minimum amount will remain on interest only. Additional borrowing for any existing borrower who’s circumstances do not meet new MMR requirements will only be considered if it is for essential repairs, even then it is strictly at the lender’s discretion.
Lenders will now be responsible for ensuring the borrower can afford the loan and will have to verify income. For self employed applicants, it is unlikely that an accountant’s reference will suffice and either an SA302 or 3 years of accounts will be required.
The regulatory changes are to ensure customers are obtaining mortgages that are both affordable and suitable for their circumstances. This reduces the lenders’ exposure to risk. The focus of the FCA is to rebuild trust in the banking system and these changes should take us into a more financially stable future.