This Saturday, new mortgage legislation will come into force that will make it more difficult for people to get a mortgage.
Lenders will now look in more detail at whether people looking to buy a new home can afford to pay the loan back if interest rates shoot up.
The new rules do not cover buy-to-let or second mortgages.
Affording a mortgage, increasing current mortgages or remortgaging
Mortgage lenders will ask to see information about income and outgoings, and how these might stand up to a rise in interest rates.
- Proving your income
Applicants will have to tell lenders if they expect their incomes to go up or down and may be required to provide:
- Tax returns, accounts, business plan or projected earnings (for self-employed/ contractors)
- Shares, bonuses or pension documents.
- Confirming your spending
Advisers or lenders will look at applicants' spending in three categories in order to assess how much income can afford to be spent on a mortgage:
- Essential expenses including: Food; household cleaning and laundry; gas, electricity and other heating costs; water bills; telephone; essential travel; council tax; buildings insurance; ground rent and service charges
- Basic quality of living costs including: Clothes; household goods (such as furniture and appliances) and repairs; personal goods such as toiletries; basic leisure costs, including non-essential transport; TV licence; childcare
- Repayments and other commitments including: Debts such as credit card bills, loans or hire purchase payments; child maintenance and alimony payments
- Interest-only mortgages: Borrowers will be asked to explain and show proof of a plan for repaying the full loan when the interest-only period ends. The lender will check that the plan is still in place at least once during the interest-only period.
- Checking future affordability
Mortgage lenders will look at how interest rates are predicted to change over the next five years, to see how they might affect applicants' mortgage payments.
- Paying mortgages after retirement: In cases where mortgage are due to last until after applicants retire, lenders will check whether payments are affordable on the applicants' expected income.
- Changing an existing mortgage
Applicants who want to remortgage with the same lender may not have to undergo all the affordability checks required for a new mortgage but face checks if:
- The amount being borrowed is increasing
- A change might affect what they can afford - such as extending a mortgage into retirement, or removing someone from a mortgage contract.
Getting mortgage advice
Applicants can get advice directly from a lender, such as a building society or bank, or from a mortgage broker or financial adviser.
This is what they must tell applicants in their first conversation, or provide in writing before mortgages are taken out online or by post:
- Charges: Advisers should tell applicants about their charges and how they are paid
- Range of products: Advisers must inform applicants of any limits on the range of mortgages they can recommend
- Interest-only mortgages: Advisers must discuss whether these mortgages are suitable. They mean applicants only pay off the interest on the loan, rather than repaying the loan itself. But the whole amount will have to be repaid when the interest-only period ends.