The mortgage market review is one of the most fundamental changes to the UK's mortgage market, but what is the mortgage market review or 'MMR', and what does it mean for you?
It is no exaggeration to describe the mortgage market review or 'MMR' as the single biggest shift in mortgage market regulation in recent years.
At its core the MMR will:
Ban self-certification mortgages
Tighten the rules around interest-only mortgages
Require affordability to be checked more stringently
Require tighter qualifications of sales staff
In this guide we will look at the background of the mortgage market review, assess each of the main points outlined above in terms of what it will mean for you and your chances of securing a mortgage, and see what it means for existing mortgage customers.
The MMR has its origins in the UK's house-price boom and bust in 2007 and 2008. 2007 was the height of the UK's house-price market with mortgages readily available to a wide group of people.
However, by 2007 it was also becoming clear that the liberal mortgage lending rules had driven large numbers of people into financial hardship. With mortgages available to those with little (or indeed no) deposit and a less-than stellar credit profile borrowing was high, as was risk.
With high levels of risk any change in income or repayments as a result of deals ending or interest rates rising had an immediate impact on people's ability to keep up their payments.
The government turned its focus on the existing regulatory framework and, from 2009 onwards, they started looking at making changes to eliminate poor lending.
The final mortgage market review launched on 26 April 2014, although some lenders had started to implement the changes before that.
The single biggest change for people looking to take out a mortgage is the way your affordability is assessed. Prior to the MMR your eligibility for a mortgage was determined first and foremost by what you could afford to pay back. That in turn was judged by your income.
The MMR will change all that. Instead of just looking at your income mortgage lenders will now have to consider your overall financial health, which means taking a much closer look at your outgoings as well. Crucially this won't be self-assessment, but will have to be verified by the lender.
Any outstanding debts or regular amounts leaving your account will now be deducted from your total income, bringing down your overall earning potential in the eyes of lenders.
Similarly interest-only mortgages – whereby you only pay back the interest on the money borrowed as opposed to actively reducing the debt – will be harder to come by. Borrowers will only be able to take out an interest-only mortgage if they have a clear and detailed repayment strategy.
There are also changes for the lenders and intermediaries. They will now be forced to advise on all sales and it is the lenders who will be responsible for verifying your income and, ultimately, whether you can afford the loan. That means the process of taking out a mortgage will likely take longer as trained staff are required.
Alongside judging what you could afford to realistically borrow, the new rules also mean lenders must do an interest rate stress test by applying hypothetical interest rate rises to your borrowing.
The changes of the mortgage market review have a big impact on borrowers looking for a mortgage now.
The crack down on expenditure, and not just income, means big costs like childcare will be taken into account, but also any other regular payments like magazine subscriptions or a Netflix account.
The more dependents you have on your income – from a car to a habit of dining out once a week or going on holiday twice a year – the less you will be able to borrow.
Consequently if you're looking for a mortgage you should:
Cut back for a number of months by spending less. As your recent spending habits will be taken into account you can maximize the amount you'll be offered by spending less.
Pay off any debts. Outstanding debts will similarly count against you, so if try and clear your debts before applying you're likely to be offered a mortgage with better conditions.
Calculate what you could afford to repay based on current interest rates and following a series of rate rises. There's no point going for a 2.5% mortgage now if you can't afford a 5% interest rate on your borrowing further down the road.
Plan in advance. The requirements for lenders to only offer advised mortgages means making an appointments, and the length of that appointment, may take longer than it used to.
If you already have a mortgage the impact of the RMR will be minimal for now, it will only impact you if you try to extend your borrowing.
However, for those who have recently agreed a mortgage in principle the rules coming into effect could mean you have to restart your mortgage application.