Back in April 2014, tougher lending rules were introduced throughout the United Kingdom in order to ensure that banks and lenders no longer over-burden borrowers.
One of the causes of the great recession we’ve just emerged from was borrowers taking on more debt than they could realistically repay – especially with fluctuations in interest rates. Just a small increase in interest rate led to huge increases in repayments, which some borrowers defaulted on.
The new rules look at your total cash flow – and take into account how much money you have “spare” each month when your fixed monthly costs are taken into account. Things like credit card repayments, car finance repayments and even haircuts are being factored into the equation. Now banks will only approve mortgage applications if they’re absolutely certain that the borrower can repay what they owe, without difficulty.
Of course things change, people lose their jobs, and others go on to work their way up the career ladder – increasing their income at the same time. The new mortgage checks won’t stop people defaulting on mortgage repayments altogether, but they’re designed to prevent reckless lending – and promote responsible borrowing.
Lenders and experts are advising would-be borrowers to get their finances in order before applying for a mortgage, that also includes devising a realistic monthly budget that can be supported through bank statements and pay slips. While in the past lenders carried out limited affordability checks on borrowers, the onus is now on them to ensure that borrowers can afford to repay mortgages; otherwise they face large fines and other sanctions from the regulator.
If your finances are in order and you have a monthly budget devised, then the chances are that these new rules won’t trouble you, should you apply for a mortgage, buy and move into your new house. You also will need to be able to demonstrate that your income is sufficient to meet the repayments and other bills that you have to foot before a lender will approve your application, however. You can read more about the new mortgage rules at Money Saving Expert.