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How the new mortgage regulations will affect you.

Borrowing with a mortgage is getting more difficult again.

Donkey’s years ago it took a whole lot of jumping through hoops to borrow for your house. You used to spend years paying into the building society so that they’d believe in your ability to pay back the loan. And shock horror, the building society would lend you money that they actually held as deposits. A system we could all understand.

Then as the world got smaller and competition might come from the other side of the world as well as the other side of the street, the banks had to come up with new cunning schemes to make more money. Instead of lending us real money they reduced the ratio of real money held to money lent so that they could let us have more.

You could self certify your income if you were self employed, you could show that you were being paid, but you didn’t have to prove that you weren’t over committed elsewhere, and money was easy to get hold of, albeit at higher interest rates.

For a while that worked well for the country – it meant that we could borrow more, buy more, and that meant that the building trade saw a boom, house prices went up quickly because we were buying much younger and that made the market stronger.

It wasn’t just houses we were buying, if you had a house you were encouraged to borrow against it, releasing the equity, to buy other stuff that you may, or may not need. So we bought better cars, better hi-fis, if something broke you just replaced it rather than even thinking about getting it repaired.

But of course it wasn’t real money, and eventually it all came crashing down around us, the bubble starting to burst in 2008, and by 2010 everyone was properly worried. The banks had to stop throwing money at us. Suddenly credit was restricted, borrowing became harder again. The predicted mass repossessions didn’t happen thankfully as the ultra low interest rates meant that people could keep paying so long as they could hold on to their jobs.

Now the country is getting back onto its feet, or so we’re told, the Financial Conduct Authority (FCA) is charged with ensuring that we don’t get into the same pickle again. The market, all markets, are fragile. There is much speculation that interest rates could rise, and that creates fear over people’s ability to cope with the extra expense of their borrowing. Looking at my own mortgage if rates were to go up by 2% I’d have to pay another £200 a month – that’s a heck of a lot to find on top of my regular outgoings, and yet I’d still only be paying 3.5%. Older friends talk about having 15% mortgages in years gone by – that would cost £1750 extra! I’d be homeless for sure.

What the FCA has done with its Mortgage Market Review rules is to force the banks into a position of checking the longer term affordability of getting a mortgage. Applicants will need to prove their ability to absorb an interest rate increase, offer up more convincing proof of income, especially if self employed, and people will not be able to have a non-advised sale.

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The annoying side of this for anybody sensible who knows what they are talking about is that they’ll have to listen to a 19 year old sales person in a bank telling you the importance of prudence, and you’ll need to jump through more hoops. But then you need to remember that the amount you’re looking for might be hundreds of thousands of pounds. Remember that if you get it wrong you might have to lose your home. With that in mind it stands to reason that you should have to go through some pain, or at least contemplation, before quite such a large pile of bullion is pushed across the table to you.

The new regulations state that lenders are now fully responsible for checking that the customer can afford the loan – I would have hoped that they were before, but there you go. You’ll still be able to get an interest only loan, but you’ll need to prove that you have a credible plan for repaying the amount owed eventually – such as setting up a pension that will pay it, or a future sale of an asset.

The mortgage seller must have a qualification in mortgage issues, so my nineteen year old in the bank will have at least been trained. I don’t know why I’m so hard on the kid in the bank branch – I was that person once, and I’d like to think that I was pretty good at the job too. All in all, expect it to take a bit longer to borrow the money you need, and to answer a few more questions. But don’t get wound up about it, it’s in your interest.

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