Mortgage Market Review and income and affordability

mortgage market review

How the Mortgage Market Review affects affordability

An area where the upcoming Mortgage Market Review has already had an impact is in affordability and budget planning.

The Mortgage Market Review makes the lender responsible for confirming that a regulated mortgage contract is affordable to the borrower. This of course means that full evidence of income needs to be gathered in all cases.

Beyond this the lender has to consider the committed expenditure of the borrower in relation to any continuing credit arrangements or household expenses.
Committed expenditure items would include:

  • loans
  • credit cards
  • hire purchase arrangements
  • child maintenance
  • alimony
  • cost of repayment strategy on interest only mortgage

household costs would include:

  • housekeeping (food washing)
  • gas and electricity or other heating
  • water
  • council tax
  • telephone
  • insurance
  • essential travel

the above list of items will be considered essential for any household

there is a further list of items that are likely to vary between each applicant:

  • clothing
  • household goods such as furniture
  • household repairs
  • personal good such as toiletries
  • recreational costs
  • childcare

Lenders have a choice to obtain details of the actual expenditure of each household or use statistical data based on the composition of a model household to determine a level of expenditure. Currently many lenders use a combination of the two. In this scenario the clients to fill in a budget planner on which the lender will base their affordability calculations unless the figures in the budget planner do not meet the minimum suggested for the household composition.

Beyond this it is required that a firm is reasonably aware of any changes to income and expenditure that are known or expected during the term of the regulated mortgage contract. A classic example of this is retirement – in the case where a mortgage runs into retirement lenders are likely to request proof of retirement income. This is not always easy and the regulator states that the degree of scrutiny to be adopted can vary according to the period of time remaining until retirement.

Stress testing

Lenders will also be asked to take into account the likely effect of future interest rate rises on whether the customer will be able to pay the sums due. Particular attention is to be paid to the first five years of a regulated mortgage contract. This will not apply where the mortgage contract has a fixed rate for a minimum period of five years.

Borrowers can expect most mortgage applications to include a budget planner where household expenditure can be documented.

There is likely to be further scrutiny of bank statements in order to match actual spending to budget planner figures.

coming tomorrow…the Mortgage Market Review and mortgage product fees

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