The world of mortgage advisers has taken a seismic turn following the launch of Mortgage Market Review (MMR) on April 26th this year. This date will be forever etched in the memory of all involved in this hugely important sector. As I have mentioned before, the largest impact of MMR has been the need for lenders to consider the affordability of a mortgage. Both for now and also considering potential future rate rises! Where is Mystic Meg when you need her?
This is all well and good, but in truth, no adviser worth his salt would seek to encourage borrowers to take a mortgage they cannot afford and, yes, we are capable of looking out into the future and assessing the impact that rates rises might have.
We have experienced a recent example of how this initiative has caused problems by not allowing a level of common sense to prevail and the brief details are as follows. The client is approaching the end of a five year fixed rate. When it was taken out the rate was 5%. Payments have been made on time, all of the time and the client now wishes to take another five year fixed rate but this time the rate will be 1.3% lower and therefore much cheaper than before. His job is the same as five years ago and his income has increased, albeit marginally. Yet the new lender has decided that the client cannot afford the mortgage despite the fact that he has paid at the higher rate for five years!
This is not an isolated case and it causes me to question the sensibility of those in charge of these decisions as, whilst there is no doubt that affordability is crucial, so is a credible sense check to understand the applicants overall ability to pay. In many cases accurately completed budget planners, mandatory in any climate, will give a picture of the applicants disposable income and most lenders should use this to determine what amount can be apportioned to the mortgage. This is known as ‘Debt to Income Ratio’ and is another key factor in the underwriting process. The danger here is that some lenders use the Office of National Statistics figures which are an average and which often bear no relation to reality yet cause declines to happen as they may point to a reduction in perceived affordability.