After the 2008 credit crunch and the financial crash that followed, the UK government carried out a thorough review of the mortgage market, implementing changes that came into force in 2014.
These changes were the result of the conclusion drawn by the government that mortgages were too readily available too many high-risk mortgages had been approved, ones where borrowers couldn’t make their repayment, and this had exacerbated the crash.
To avoid this happening again, the government decided to tighten lending requirements for mortgages, which is where the mortgage market review, or MMR, comes in. It was one of the most significant changes ever made to the UK mortgage market and had a considerable impact on both lenders and borrowers.
What Is The MMR?
In essence, the MMR is an assessment of affordability. It requires all lenders to carry out stress tests to make sure a borrower can make their mortgage repayments even if interest rates rise. As part of this stress test, borrowers need to provide evidence of their ability to repay their mortgage including having stable and sufficient sources of income and limited borrowings.
What Is Included In The Affordability Assessment?
Previously, lenders had made decisions based on a person’s income, calculating how much they could borrow by multiplying their salary. Now, they must make a more detailed assessment of a borrower’s overall financial situation that includes:
- Your credit report and credit score
- Your employment history and income
- Your account balance over a set period, flagging any unusual deposits, income or outgoings (which you might need to explain)
- Whether you have savings, and if you save regularly
- Whether you live within your means or carry an overdraft
- How you spend your money, e.g. do you gamble excessively or take expensive holidays Regular outgoings, e.g. rent, child care, memberships or school fees
- Other credit commitments, e.g. loans, credit cards, hire purchase agreements or other regular outgoings, e.g. Netflix.
The bank can do this assessment, or they may use the services of an underwriter to decide on whether you are approved for a mortgage.
The MMR also brought about changes that restricted the availability of interest-only mortgages, which require the borrower to pay back the capital costs at the end of the mortgage term. Borrowers wanting an interest-only mortgage must now provide detailed financial plans evidencing how they will make payments.
The Impact On Existing Mortgage Holders
If you already have a mortgage and are making repayments without any issues, the MMR is unlikely to impact your ability to get a mortgage on a new property or remortgage your existing home.
What Should I Do If I Want To Apply For A Mortgage?
While the rules around applying for a mortgage are stricter than they were before, this doesn’t mean that you can’t get a mortgage, it just means you might have to work harder to evidence your ability to make payments than you would have before 2014.
To improve your chances of being approved, before you apply you should:
- 1. Save as big a deposit as you can; the larger your deposit, the lower your interest rate is likely to be. First-time buyers might want to look at Help to Buy ISAs to get more interest on their savings.
- 2. Research the mortgage market, so you understand what type of mortgage you want and how much you want to lend. Speak to your bank to find out what mortgages are available or enlist the services of a mortgage broker.
- 3. Calculate how much you could repay based on current interest rates and after any potential interest rate rises. You can use this to evidence your ability to pay with lenders.
- 4. Reduce your incidentals spending and pay off or reduce the size of any debts; lenders are looking at both sets of outgoings when deciding how large a loan to offer you.
- 5. Know your credit score; if it’s lower than you need to get a good interest rate, work on improving it before applying for a mortgage.
- 6. Make sure you are on the electoral roll. Lenders use this to verify your identity.
- 7. Have all your paperwork in order, including bank statement, payslips or P60s, passports and driving licenses and evidence of any income from child benefit, pensions, or self-employment.
Finally, remember to be realistic. If you are applying for a mortgage, the MMR is designed to make sure you don’t over-extend yourself and end up in a position where you can’t make repayments. It is much better to apply for a mortgage that you can afford and be approved than ask for one you can’t and be turned down.