Mortgage Market Review: What you need to know
April 30, 2014
What was the MMR?
The Mortgage Market Review (MMR) was a comprehensive analysis of the mortgage market. Following on from the MMR new regulations were implemented by the Financial Conduct Authority (FCA) on April 26.
Why was the MMR needed?
The MMR set out reforms to the current mortgage market to ensure its continued recovery and sustainability in the wake of the credit crunch.
Policy makers believed that the current regulatory framework was ineffective in keeping high-risk lending and borrowing in check. The policies stemming from the MMR will ensure that those who can afford mortgages can access them, while preventing a return to the poor practices of the past.
What does it mean for borrowers?
The MMR has tightened affordability checks, with the aim of ensuring loans are not granted to borrowers that cannot afford to repay them. Borrowers will need to provide lenders with more evidence of both their income and day-to-day expenditure. It is expected that customers will be asked about their spending habits, including, but not limited to, estimated outlays on:
- holidays and nights out
- season tickets
- pension contributions
Mortgage applications are likely to take longer as lenders, brokers and borrowers will need to fully familiarise themselves with the requirements of the new system. This will affect the number of applications that can be processed as more time will be needed to assess the customers credentials. The new procedures mean that mortgage interviews could take up to three hours.
How will MMR affect the PRS?
At the moment Buy-to-Let (BTL) mortgages sit outside this regulation but it is expected that they will come under the same regime in the near future. So BTL mortgages may start to follow the same stringent checks that a residential applicant has to go through as the criteria will be closely aligned for both.
When assessing an investor’s minimum income (if required), a lender will expect to see evidence of income along with copies of any recent bank statements. Self-employed landlords will be expected to produce their SA302s, (the self-assessment tax calculation that can be obtained from HM Revenue & Customs) while employed applicants will be expected to provide P60s and 3 months of payslips.
Underwriters will be assessing the case to establish whether the borrower would be able to keep up the repayments from their own funds in the event there were any void periods. They are unlikely to only rely on an assessment of rent as it doesn’t reflect the due diligence being carried out on the residential side.
The aim of this is to prevent potential unscrupulous people entering the BTL market as lenders. The FCA are also keen to prevent those unable to obtain a residential mortgage from using the BTL route as a means for accessing borrowing. They are therefore being more stringent and assessing all cases closely irrespective of whether they are residential or BTL cases.
When asked about the MMR’s possible impact on the PRS Neil Young, CEO of Young Group, said, “The greatest impact will be on owner occupation transactions, rather than investment purchases, and this could result in a sluggish sales market.“
“I believe the changes will generate increased rental demand and we may well see enhanced rental levels on the back of this.”
What is on the horizon?
The Mortgage Credit Directive (MCD) is a proposed Directive on Credit Agreements relating to Residential Property. The MCD aims to create an EU wide mortgage credit market with a high level of consumer protection. Some of the main provisions would include :
- rules and standards for the performance of services
- a consumer creditworthiness assessment obligation
- provisions on early repayment
The directive is currently being discussed by the European Parliament, Council and Commission.
The short term effects are that there will be a longer application process, the long-term benefit of these changes will mean that lenders will avoid lending that could result in consumer detriment.