The regulations introduced in 2014 by the MMR enforced stringent affordability checks and guidelines for mortgage lenders, impacting how mortgages are assessed and approved. This article is part of our series of mortgage types in the UK. Read on to know what the changes were and how they altered the borrowing market.
Role of the financial services authority
The Financial Services Authority (FSA) played an important role in the formation of the UK's Mortgage Market Review (MMR).
The FSA's involvement was a response to the financial instability of the late 2000s. This period exposed significant flaws in mortgage lending practices.
The FSA's objective was to reform these practices, ensuring future financial stability and protecting borrowers.
Impact of the credit crunch on mortgage policies
The credit crunch altered the UK's mortgage landscape. It triggered stricter regulatory measures in mortgage lending to prevent irresponsible lending practices.
This shift was necessary due to the previous prevalence of self-certification mortgages, which allowed borrowers to declare their income without providing evidence.
Such practices contributed to the financial crisis, leading to a complete reassessment of mortgage policy.
New mortgage rules
Shift from self-certification to responsible lending
In 2014, the UK's Financial Conduct Authority (FCA) introduced significant changes in mortgage lending. The most notable shift was moving away from self-certified mortgages.
This change marked a concerted effort to ensure responsible lending practices. Previously, borrowers could self-certify their income without providing substantial evidence, a practice that often led to impractical borrowing.
The new rules required lenders to diligently verify a borrower's income, ensuring loans were only granted to those who could realistically afford them.
This measure was designed to protect borrowers from overextending themselves and to stabilise the housing market.
New criteria for assessing borrower's income
Under the 2014 mortgage regulations, lenders began applying stricter criteria for assessing a borrower's income. The application process became more rigorous, with lenders scrutinising not only income but also existing debts, household expenses, and even future financial changes.
This holistic approach aimed to assess the borrower's ability to sustain mortgage payments over the long term, especially if interest rates rise. Lenders now needed to demonstrate that they had considered potential interest rate increases over the mortgage term and their impact on the borrower's capacity to repay the home loan.
Interest-only mortgages: then and now
The new mortgage rules transformed the approach to interest-only mortgages. Previously popular for their lower initial payments, interest-only loans became more regulated in 2014.
Lenders now required a credible and well-documented repayment strategy from borrowers. This change meant that borrowers could no longer rely solely on the hope of rising property values to settle their loan at the end of the mortgage term. Instead, they needed a solid plan, like investments or savings, to ensure they could repay the capital.
This requirement led to a decline in the popularity of interest-only mortgages, as many borrowers found it challenging to assure lenders of their ability to repay the loan at the end of the term. This shift was part of a broader move towards more sustainable borrowing practices in the UK's housing market. Read in detail about retirement interest-only mortgages.
Impact on mortgage applicants and lenders
The Mortgage Market Review brought significant changes for mortgage applicants. Many lenders, influenced by these changes, began scrutinising applicants' income and outgoings more closely. This resulted in a more comprehensive but also more demanding application process, especially for first-time buyers who often face stricter scrutiny under these guidelines.
For first-time buyers, the new mortgage landscape presented a blend of challenges. The stricter lending criteria meant they had to prepare more robust financial profiles, showcasing stable income and sensible spending habits. These requirements, while daunting, were designed to protect buyers from overextending financially, promoting a more sustainable mortgage market.
Annual income and spending habits: what lenders look for
Lenders, in response to the FCA's guidelines, now placed greater emphasis on applicants' annual income and spending habits. This scrutiny ensures that loans are granted based on a borrower's true ability to repay, rather than on over-optimistic projections.
Applicants must therefore be prepared to disclose detailed financial information, demonstrating their reliability as borrowers. Learn how to make a successful mortgage application.
Response of mortgage lenders to new regulations
Adjustments by building societies and banks
In response to the Mortgage Market Review, building societies and banks made multiple adjustments to their lending practices. These institutions now employ more rigorous assessment methods, focusing on the long-term financial stability of applicants. This shift represents a move towards more responsible lending, aligning with the FCA's objectives.
Adopting common sense principles in lending
A notable outcome of the new mortgage rules is the adoption of common-sense principles in lending. Mortgage lenders, including building societies, have integrated these principles into their processes. This approach balances financial prudence with a realistic understanding of borrowers' situations, promoting a fairer and more sustainable mortgage market.