Should we be stressed about our mortgages?

Mortgage lenders will ban potential borrowers from taking loans unless they can show how they can afford to repay them when interest rates rise, under strict rules set to come into force within months, say Lee Boyce and Becky Barrow, writing in Mail Online earlier this week, here.

They say that new rules drawn up by the City regulator, the Financial Conduct Authority (FCA), following its Mortgage Market Review will begin in late April with the aim of ensuring borrowers do not take on more than they can chew, and ease fears of a repeat of the lending trap many fell into pre-2009 when interest-only self-certified deals grew in popularity.

To remind you, the MMR was a comprehensive review of the mortgage market, which started with a Discussion Paper in 2009 and culminated in a Policy Statement and final rules in October 2012.  It sets out the case for reforming the mortgage market to ensure it is sustainable and works better for consumers. Lenders must ‘stress test’ a homebuyer to see if they will be able to afford potentially higher monthly costs as rates rise and to generally lend more responsibly. There’s more on the FCA’s take on this, here.

Most banks and building societies have adopted the changes early and already test applicants on the basis of mortgage rates hitting seven per cent in the next five years to make sure they can cope.  Currently, some lenders are advertising two-year fixes at a rate as low as 1.49 per cent – so this would be a huge increase to monthly outgoings.

Mortgages have never been cheaper thanks to the Bank of England cutting the base rate to 0.5 per cent nearly five years ago, the lowest level in its 320-year history.  But the base rate will inevitably rise and regulator the Financial Conduct Authority insists loans must not be handed out if a bigger mortgage bill could break borrowers’ finances. Borrowers will also have to be more extensively checked, with day-to-day finances and spending coming under forensic investigation. Under the new rules, a lender will need to know everything about your finances from how much you earn and how much you spend on food and utility bills every month, to the size of your debts.

The Mail Online article says that it is believed the majority of major lenders have already been stricter with their criteria when it comes to granting a mortgage, something that is being felt by applicants.

Oh Yes, I should mention something about major mortgage loan lender NatWest which is currently running a campaign – ‘NatYes’ – in which it boasts that nine out of ten mortgage applications are approved. It says no change will be made to this pledge as a result of the Mortgage Market Review.

This week, The Bank of England governor played down the threat of a UK housing bubble even as the Royal Institution of Chartered Surveyors (RICS) warned that house price rises could become unsustainable in some areas. He says that this is so because mortgage approvals and sales were picking up from low levels during the financial crisis. He expects the recent surge in the property market to cool by 2016, as figures published this week confirm that house sales have returned to levels last seen in early 2008, reported here.

It used to be the general rule of thumb that if you wanted a mortgage, you could borrow up to four times your income or three times the joint income of a couple buying their home, all done without checking your finances.  Whatever you might read about elsewhere, those days are over.

So, how stressed should we be about the return of rapidly rising house prices? An interesting chart was incorporated into an article by Angela Monaghan in the Guardian yesterday. It illustrates, what she describes as “the disturbing relationship between house prices and wages” and makes her think we should all be very worried. The red line in the chart is the annual house price inflation while the green line is the annual growth in pay, both as measured by the ONS. When the red line is above the green line it means that buying a home is getting more expensive.