If you’re looking to buy a new home it’s likely that you’ve heard about the recent changes to the new mortgage lending criteria which were introduced earlier this year. But do you understand exactly what the Mortgage Market Review is and how these new affordability measures will affect you when applying for a mortgage?
Among the 28% of those that claim they do, a large proportion are either confused or ill-informed.
– 43% think the introduction of the MMR means they can apply with smaller deposits when in fact you’re likely to need a larger deposit to make mortgage repayments more manageable
– 19% believe lenders have relaxed their lending criteria but actually the approval process has become more rigorous
– Only 44% correctly understand that it means lenders are now more careful to ensure mortgage applicants can afford their repayments, both now and in the future
– Just 15% are rightly aware that they need to speak to an advisor before getting a mortgage
– 55% of those surveyed feel more confident about getting a mortgage, although other findings suggest this confidence may be misplaced
Since the MMR was introduced earlier this year, reports have shown a decline in mortgage approvals – the lowest levels of approved mortgages since June 2013. This is because checks have become more stringent – lenders must thoroughly analyse mortgage applicant’s income and expenditure in order to determine how much they can realistically afford to borrow – both at present and in the future. Therefore, those hoping to borrow to purchase a property need to show that have considered how they will be able to manage their repayments in the long-term, for example when interest rates rise.
The MMR was introduced to ensure banks and building societies would lend more responsibly. It may be harder for mortgage applicants to pass the new lending criteria, but it’s important that these measures are in place to prompt home-buyers to take a more realistic view on their finances.
Results from Experian’s survey also showed that a quarter of all would-be-buyers surveyed admit they find it difficult to budget each month.
– Half (49%) confessed to overspending in the last month
– A third had to dip into their overdraft last month – 8% heavily
– One in seven (14%) said they are unable to cut back outgoings any further
Preparation is key
With the more detailed checks that lenders are now required to make, it’s even more important that mortgage applicants ensure their finances are in the best possible shape to gain approval of their application and secure a better interest rate. However, interestingly results from the recent survey have shown that very few potential buyers are doing just that. A fifth (19%) don’t plan on preparing their finances before applying for a mortgage, whilst another fifth (19%) are planning to just one month prior to their application.
In addition to this, less than one in four (23%) have checked their credit score in the last six months , which would give them a clear picture of their financial situation and help understand how they’re likely to be viewed by lenders.
Of those looking to buy a property:
– Only a fifth plan to make a clear six-month budget
– A quarter (26%) plan to clear outstanding debt
– A further 15% plan to pay off any outstanding credit
– Only a third plan on cutting back on luxuries in the lead up to their application
Although none of us can predict what will happen in the future, circumstances have a habit of changing so it’s important to take a conservative approach – we should take into consideration how our situations may change and have a clear understanding of how much we can afford to borrow currently and in the future, if such events occur.
Here are some simple tips from Experian CreditExpert to help you prepare for a mortgage application after the Mortgage Market Review:
Know your budget – as soon as you decide to look for a property, scrutinise your last few months’ outgoings carefully to understand your spending habits. Are there things you could do without so you can finish each month with cash in the bank?
Know what you can really afford – visit a broker or use an online mortgage calculator to work out your likely repayments. Importantly, play with the interest rate settings to see if you could afford the repayments if rates rise by 1% or 2%
Make sure your credit report is up to date – as well as checking your outgoings, you should also check your credit report, which includes a record of all your borrowing over the last six years. Ensure everything is accurate and up-to-date
Does your Experian Credit Score need work? The Experian Credit Score is a guide to help you understand how a lender might score your credit worthiness. If it’s lower than you expected, ask the experts for help and ensure your credit report paints the best picture possible before you make your application
Build good behaviours – finally, from now until your application, try to appear like an ideal mortgage borrower. Show you can make it through several months with a slight surplus. Don’t take out additional borrowing and try to demonstrate you can comfortably manage any outstanding credit commitments you have
Source: Experian CreditExpert