We are all living in rapidly changing times for our finances and mortgage affordability is one area that has recently come under the microscope. Interest rates have been rising and this has caused concern among those borrowing money to buy a home. However, the Bank of England have announced they are removing the mortgage affordability rule. That means lenders will not have to check to see if mortgage applicants can afford to pay a mortgage at higher interest rates. What does that mean in terms of applying for and getting mortgage?
Is it Easier to Get a Mortgage?
With the mortgage affordability rules scrapped, does that make it easier to get a mortgage? The affordability test was introduced by the Bank of England in 2014 to ensure lenders did not take on loans they could not afford to pay back. The fact the Bank of England have increased interest rates for the fifth time recently means the removal of the affordability test has caused some confusion. It is worth noting there are other measures still in place when taking out a mortgage, including the size of a mortgage based on the income of borrowers and FCA affordability standards.
However, what the removal of the mortgage affordability rule does mean is that some borrowers will be able to obtain a mortgage for money than they otherwise would have before the rule was removed. Nonetheless, anyone who has been struggling to afford a mortgage is not instantly going to see a change in heart from lenders. On the other hand, it could help people who have been paying rent well over the amount of mortgage payments but have failed affordability tests. So, in some respects, removing the mortgage affordability rule could make it easier to get a mortgage but individual circumstances continue to play a significant role in decision making. There are several red flags that could hinder your chances of getting a mortgage and we will look at some of the more common issues. owverr
Pay Day Loans
In a survey conducted by Boon Brokers, which included over 2800 people, the number one factor that would give lenders concerns is pay day loans. Lenders will always check bank accounts and it is impossible to hide financial information when applying for a mortgage. A pay day loan is a loan taken out at a high interest rate that is paid back on the next pay day of the borrower. Having a pay day loan on your financial history does not automatically eliminate you from getting a mortgage. The lender will consider the number of pay day loans, recent frequency of pay day loans, and any other past credit issues.
Gambling
The second most common response in the study when asked which factor lenders would see as a red flag for a mortgage was gambling. Unfortunately, many gamblers are unaware how betting could have a negative impact when applying for a mortgage. In fact, 58% of people in the survey were unaware gambling could stop them from being accepted for a mortgage. Things that could affect your affordability, such as gambling transactions and pay day loans will appear on bank statements that must be shown to lenders. Even if you can hide the name of the betting company so it is not clear where the money went, this is a red flag and lenders will question where the money has been going. The sums of money involved, the regularity, and affordability of gambling will all be considered by a lender, so having a gambling record on your bank statement will not automatically rule out getting a mortgage.
Overdraft
Using the overdraft facility of a bank account come the end of every month could influence the decision of a lender. The bank wants to know it will receive monthly mortgage payments on time and an account that is always in overdraft at the end of the month does not give a good impression. Recently taking out a new credit card can also have a detrimental effect on a mortgage application.
It is worth remembering lenders usually ask for three months of bank statements when considering a mortgage. That gives you enough time to make any changes to your financial activity before you submit the application form. Changing bad spending habits, avoiding gambling, not using the overdraft, not taking out pay day loans and not getting a new credit card will all help when applying for a mortgage.
So, just because the mortgage affordability rule has been scrapped, lenders will not be handing out mortgages freely, without other considerations. Yes, the removal of the mortgage affordability rule means you could lend more money to buy a home and those paying high rents might benefit. However, it does not mean it has become easier to get a mortgage because other criteria, as highlighted above, remains in place.
