New mortgage rules pushing up rates?
04-27-2014
Banks and building societies limit types of mortgages on offer as new lending rules came into force
Halifax property and mortgage guide: choosing a mortgage
The Mortgage Market Review has led to speculation that lenders will move away from two-year fixes and offer longer deals
By Nicole Blackmore
Banks and building societies have limited the types of mortgages they offer and some have pulled out of certain markets altogether as new lending rules came into force today.
The Mortgage Market Review has turned interest-only and regulated buy-to-let into niche product areas and led to speculation that lenders will move away from two-year fixes and offer longer deals.
Here we look at how products have changed – and become more restrictive – under the new rules.
Short-term deals
Last week the Financial Conduct Authority said it had concerns about financial companies that used cheap headline rates to suck customers in if they were not able to afford the higher rates when an initial offer period ended. This led to speculation that two-year fixed mortgage deals might disappear in favour of longer fixes.
But the FCA said it did not want to discourage two-year fixes, adding that the stress tests being implemented under the MMR would force lenders to evaluate whether borrowers could afford loans in the long term.
A spokesman said: “All mortgages that are fixed for less than five years will have to be stress-tested, so shorter deals are fine but we could see the proportion of longer-term deals increase as a result of the changes.”
Brokers are confident that two-year fixes will remain popular with both lenders and borrowers. Mark Harris, chief executive of SPF Private Clients, said: “If borrowers are being stress-tested to ensure they can afford repayments when rates are higher, there is no need to abolish cheap short-term fixed rates. The next time banks need to lend to hit their targets they will release highly competitive short-term fixed rates.”
Interest-only
These loans allow the debt to be repaid at the end of a typical 25-year term, with the interest being paid monthly.
Monthly bills start much lower and the borrower must save to clear the debt at the end of the term. This practice rose before the 2008 financial crisis, but almost disappeared when it became clear that hundreds of thousands of borrowers would struggle to repay the capital.
Interest-only loans are still available, but not all lenders offer them and they are now seen as a niche product.
To take out an interest-only deal you are likely to need at least a 25pc deposit and a clear and realistic repayment vehicle that will allow you to pay off the capital sum in the future. Lenders that still offer interest-only deals include Santander, Halifax, Barclays and Virgin Money.
Regulated buy-to-let
In the main, buy-to-let (BTL) mortgages are not regulated, so landlord borrowers are unaffected by MMR. But if you intend to live in a property in the future or a close relative, including parents, siblings, children, grandparents and grandchildren, will live there, the loan must be regulated.
NatWest, Coventry Building Society and Clydesdale Bank have all pulled out of regulated BTL lending as a result of the MMR. Banks and building societies that have only a small number of regulated BTL customers say they simply don’t have the resources to carry on offering such a niche product.
Moving or 'porting’ mortgages
Many mortgages were sold with assurances that they could be moved – or ported – to a new property midway through the loan. The MMR rules say that existing borrowers will only need to meet the new affordability requirements if they want to borrow more, change the length of the loan, remove someone from a mortgage or move it to a new lender. Some lenders, however, are applying the tests to people who just want to move house.
Problems are likely to arise because many existing borrowers would not qualify for their mortgages if they were reassessed under the tough new affordability tests, even if their income had improved or they were moving to a cheaper property.
Borrowers who want to move house could find they are forced to pay an early repayment charge to move their mortgage to a more lenient lender. Others will be forced to stay where they are.
David Hollingworth, of broker London and Country, warned that the majority of lenders were likely to apply the full affordability tests to those who wanted to port their loan.
“In theory they do not have to but in practice most lenders will choose to reassess borrowers, even if they don’t want to borrow more,” he said