MMR hits borrowers on low incomes hardest
Lenders identified low income borrowers (85%), borrowers with dependents (77%) and self-employed or single borrowers (both 38%) as the three types of borrowers who have felt the biggest impact in terms of what they can borrow under MMR. Brokers felt borrowers with dependents have been the most affected (72%), followed by low income borrowers (60%) and self-employed borrowers (47%).
Peter Williams, executive director for IMLA, said: “For many lenders, the MMR switchover has been more of a gradual shift than an overnight change. Even so, these are still early days and – with processes being fine-tuned – the real test will come beyond the six month milestone when we see if these effects have eased off or endured.
“The fact that interest rate stress tests are having the biggest impact on borrowers shows they are doing their job by identifying those who would struggle to manage their repayments if rates rise. It may involve some short-term pain for those who can only borrow less than they were hoping, but it is a necessary move to protect their long term financial position when the inevitable rise occurs.
“Lenders are keen to balance sensible checks with the desire to find an answer to borrowers’ needs. Brokers are an integral part of the new regime and their advice is becoming increasingly valuable to match consumers to a suitable lender and product.
“Nonetheless, the available options have clearly diminished for some borrowers more than others. The spirit of innovation must be kept alive under MMR so new solutions can be offered to creditworthy consumers in a range of circumstances.”
IMLA’s research found opinion split about the scale of MMR’s impact on consumers. Almost two thirds of brokers (63%) believe significantly more borrowers are being turned down as a result of interest rate stress tests, but just 15% of lenders agree. The difference is likely to reflect the fact that while lenders are reporting on trends within their individual businesses, brokers working with multiple lenders have a view across the wider market. It may also be the case that brokers are advising some borrowers against submitting an application to lenders, based on a discussion about their finances and needs.
However, both parties do agree that stress tests have had more of a direct impact on the amount consumers can borrow, compared with other changes to the MMR approval process. Almost four in five (79%) brokers believe interest rate stress tests have reduced the amount that can be borrowed, with over half of lenders (55%) in agreement. More than one in three brokers (35%) feel that stress tests have reduced loan sizes by more than 10%.
Fewer brokers believe that more detailed income/expenditure assessments (58%) or evidencing requirements (42%) have had a direct impact on what consumers can borrow – although these numbers are still significant. Lenders report less of an effect: 45% believe income/expenditure assessments have reduced loan sizes, but fewer than 10% feel evidencing requirements have had any effect.
The majority of lenders (71%) and brokers (58%) believe that MMR will have a positive effect on consumers by improving the quality of advice they receive. Four in five lenders (81%) also believe the changes will improve consumers’ awareness of mortgage affordability and their related expenditure, with 61% of brokers agreeing.
However, there are concerns over the implications on products, with 71% of brokers believing MMR will have a negative impact on sourcing mortgages. Reflecting this, 54% of lenders feel it will negatively impact product innovation and limit their capacity to develop new offers.