UK homebuyers may find it more difficult to get a mortgage, as lenders deal with a wide range of new regulations aimed at preventing lending to people more likely to default on their mortgages. The new regulations require homebuyers to take strict tests aimed at assessing their ability to cover all aspects of household spending.
Examples of household spending tested by the questionnaires include the costs of childcare, takeout food and more. The measures are part of an effort by regulators based in the City of London to prevent the large-scale unaffordable lending which played an instrumental role in the 2008 financial crisis.
Starting from the 26th of April, applicants for mortgages will be required to offer at least three months of bank records to lenders. The statements will be studied to see if borrowers are able to make steady, timely payments on their home loans based on current interest rates, as well as in the event that the cost of credit rises.
While the new regulations are aimed at reducing ‘reckless borrowing’, critics of the regulatory measures believe that homebuyers can sidestep the precautions through strategic spending prior to applying for their loans. Brokers could, conceivably, just encourage buyers to stay frugal for the three months prior to their applications.
According to mortgage brokers, individuals with high incomes who spend relatively little on luxuries could borrow upwards of eight times their annual income through a mortgage, if their questionnaires provide the right answers. Experts believe that the measures, although well meaning, may not effectively combat reckless lending.
Although few examples of the qualifying questions are available, experts note that existing bank applications ask potential borrowers about the amount they’ve spent on parking, entertainment, holidays, pets and more. As childcare costs will become an important factor in applications, applicants with children could be affected.
While the questionnaires will play a role in determining applicants’ access to home loans, traditional factors such as credit scores and monthly expenses, such as loans for vehicles, will still form the bulk of lenders’ decision making.
