Moving into a new house is, by far, one of the most exciting yet daunting experiences you can go through as an adult. From the location, to the neighbourhood security and outward appearance, to the amount of natural lighting their residence will have, everyone has an exhaustive mental checklist of what to look for when on the search for a new house.
One aspect, however, which most people tend to disregard, either due to complete and utter unawareness, or as a result of being overwhelmed by the joy of buying a house, is how their spending habits can affect their chances of landing a mortgage.
The Mortgage Market Review (MMR), launched by the Financial Conduct Authority on 26 April 2014, has come as a nightmare for potential applicants for mortgage and for those with an existing deal. The review resulted in placing stricter checks on the number of people being granted mortgage approvals. With over 300 pages of rules and regulations, the Mortgage Market Review has been launched in order to prevent the leniency in mortgage lending, which was seen before the 2008 housing bubble burst in the UK.
Statistics from the Bank of England revealed that during the first month following the EU referendum in 2016, mortgage approvals fell by 64,152, making it the lowest approval rate since June 2015. It was also seen that there was a 12.5% decrease in the number of mortgage approvals as compared to July 2015. With increasing trends seen not only in average house prices but also in the house price index in the UK between February 2016 and December 2016, you need to be extra cautious to ensure that your mortgage application isn’t rejected.
Contrary to popular belief, your credit score is not the only factor taken into consideration by lenders when reviewing an application for a mortgage. Harsh policies coming into effect means lenders will now have more in-depth background checks before approving or rejecting your application.
Stress tests for mortgage, as the name suggests, are the most agonising part of the mortgage application process. Previously, lenders would simply multiply your income with a specific number and assume that it would be possible for you to easily make these payments. Depending on the lender, this rate was usually somewhere between 3.5 and 5.
Since the launch of the Mortgage Market Review in April 2014, things started to change. Lenders now have to ensure that you will not only be able to repay the amount borrowed with the current interest rate, but they will also carry out mortgage affordability checks in case there is an increase in the rate. With interest rates expected to rise from 0.25% to up to 3% in the next three years, as predicted by lead economist Roger Bootle, applicants will have to worry about an increase in payment per month.
Considering how uncompromising mortgage affordability checks have become, there is now an increasing number of lenders asking more and more personal questions before they can approve your application. This is exactly where your spending habits come into the picture. Earlier, very basic information would suffice. You could expect to be asked questions which make sense and queries would generally pertain to your income, your retirement plans, and the payment options which you believe suited your situation best. You could then make an approximation of what kind of mortgage you would be approved for.
How have things changed?
Approving applications with such minimal information is now a thing of the past. Lenders are now able to ask you questions about your lifestyle, ranging from the entertainment subscriptions you have, to how much you spend on weekend getaways. The questions may also become more invasive; asking for details about other expenditures, depending on how much is revealed through the documents you provide along with your applications.
Lenders will divide your expenditures into a few categories. Committed expenditures are the expenses which you cannot avoid such as rent and taxes. Non-committed expenditures, however, are expenses which are additional. These include all extra payments such as those made on daily coffee.
Lavish lifestyles and useless spending of money, such as excessive transactions on gambling websites, are always regarded as a negative factor when applying for a mortgage. If lenders see extravagance in your spending, there is a high chance that you will be denied. It is, therefore, best to cut down on all extra expenses for a while before you apply for mortgage since you can expect a background check of up to a few months.
Does my application stand any chance of approval?
The reason behind mortgage affordability checks is not to deliberately decrease the number of applications getting approved. They are performed in order to put an end to the irresponsible lending of mortgages which was being done previously. A hike in [liar loans]/http://www.investorwords.com/7157/liar_loan.html in the not-so-distant past resulted in a large number of problems. Even though such discrepancies will always be seen, regardless of the extent and intensity of checking, the strict methods of screening can be significantly decreased.
Despite the extensive checks, it is crucial to be honest regarding your expenses. A few late payments or money spent on occasional indulgences is perfectly fine and can be disregarded. Understating the expenses you have, may result in your lender mistakenly approving you for a mortgage which is greater than what you require. It can, ultimately, also be possible that you are unable to make payments for the excess mortgage on time, if not miss the payment altogether.
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