SPECIAL FEATURE: It’s all getting harder
There’s been a lot of discussion in the press of late about the effect the Mortgage Market Review will have upon peoples’ chances of getting a mortgage.
The tighter regulations, which come into force on April 26th, require banks and building societies to carry out a detailed assessment of a borrower’s ability to keep up with loan repayments.
We’ve all been hearing about daunting concepts, such as the eradication of the interest-only mortgage and the introduction of something intimidatingly labelled “stress testing” which will include your broker wanting to know the ins and outs of your (over-decadent) lifestyle.
However, what the news stories are failing to address is the fact that, yes, the new rules will be stricter but that’s no bad thing.
The correct regulations are important as they protect individuals from unsustainable lending. Shielding people from lending beyond their means is extremely important to our overall economy.
One area that has not been discussed is that the new rules present plenty of scope for improvement for ‘High Net Worth’ mortgage borrowers.
Under these, a HNW Individual is defined as “someone with a net income of at least £300k or net assets in excess of £3m or whose obligations are guaranteed by a person with an income or assets of such an amount”.
These sections aren’t generically black and white but it’s clear the regulator appreciates someone who is ‘High Net Worth’ does not need the same grade of protection as the mass market does.
It’s important to remember that “responsible lending” is the key to these reforms and is the overriding principle.
Consumers should not have the opportunity to overstretch their finances or take unnecessary risks with their future and that it’s the mortgage lender’s responsibility that this does not happen.
That said, there is an alternative regulatory approach when an applicant is defined as HNW on the basis their finances tend to be more complexly structured, they are (usually) more financially astute, tend to have more professional advisers and a mortgage may not present the same level of risk.
We see the MMR as an opportunity to present our HNW individuals with new mortgage opportunities as the rules fall into place.
There may well be short term teething issues as lenders figure out the new rules and high street banks adapt to their new obligations and responsibilities but afterwards there will be clear avenues for us to explore.
One of the main outcomes of the MMR is that lenders (rather than intermediaries) will be responsible for affordability checks in all cases, self-certification is completely banned and income must be fully verified.
This means lenders will have to fully explore income (in some cases to a mind boggling level) and be happy the borrower has sufficient income to meet the monthly repayments and to repay the mortgage debt.
Historically this was done via ‘income multiples’ but now there will be real calculations and assessments taking place.
We are starting to see how these calculations will affect applications and what ‘income’ will be admissible – so far it is what can be seen on payslips, P60s and SA302s but there is much more to come.
For those who can be defined as a HNW borrower the rules are a touch looser – the guidelines state lenders ‘can be flexible as to the way in which the customer meets the affordability test and that they can take account of net income and /or assets’.
This gives clear opportunity for a subjective assessment based on the client’s entire circumstances, rather than the more prescriptive approach which has to be taken for the rest of the market.
So far, we have seen this interpretation being used by one international private bank who will, post April 26th, only take applications from individuals who are certified as HNW.
We expect the lending market for borrowers will be much more open once an individual is certified as HNW.
At this point the MMR has specified that a ‘lighter tailored approach’ may be used with the applicant’s unique circumstances in mind.
This provides some leeway and negotiation scope for specialist brokerages to use with the private banks with whom they have a relationship.
In practice, interest only mortgages remain a viable option to HNW individuals.
As stated by Grania Baird in The Mortgage Market Review: “What it means for Residential Mortgage Providers’ in the context of interest-only mortgages ‘the lender must assess affordability on a capital and interest basis unless there is a clearly understood and credible alternative source of capital repayment.”
The fact that they remain, although much more highly regulated, is good news for both our clients and the market in general.
For the HNW borrower we expect the availability of interest only mortgages to be the same as it is pre-MMR – half the battle will already have been completed by way of the ‘high net worth declaration’ and the application will be (or should be) with someone at the bank who has the authority and experience to use his or her judgement as to what is ‘reasonable and credible’.
The same cannot be said at the mass market level as applications will generally be processed by computer or junior underwriters.
What this all means…
Contrary to what you may have heard, the MMR won’t be a bad thing for the mortgage market, particularly in the long-term and once the short term dust has settled.
The majority of brokerages are already acting and adhering to some of these new rules and we are seeing lenders’ stances become clear on a daily basis.
There will be a time of uncertainty whilst lenders with a particular focus on HNW individuals work out their approach to this side of the market – determining whether they will have separate processes and template documents to take advantage of the new ‘tailored approach’ – we are, and will continue to be involved in this process, just as we were with the initial discussions on the HNW definition.
What is clear is that the role of the mortgage broker will continue to become increasingly important. Much of the application process will centre on data collection and evidence.
In our view this should be done by a specialist – because as we always say – the facts are just as important as how the facts are presented.
More important perhaps will be the areas which are subjective or where judgement is required on the lender’s part – it will be absolutely vital that the lender is making their decision based on all of the facts and is challenged on their decisions.
Our role as an influencer and problem solver will be essential in achieving the best possible terms.