Friday, April 25, 2014
Ipswich Building Society has pledged to try to help “mortgage misfits” who may be left struggling to obtain a home loan as a result of new affordability tests.
From tomorrow, industry-wide changes knowns as the Mortgage Market Review (MMR) will require lenders to take a closer interest in the spending habits and life plans of mortgage applicants.
The changes follow a review led by the Financial Conduct Authority (FCA) and are designed to prevent a repetition of irresponsible lending practices seen in the years leading up to the financial crisis in 2008.
However, there are concerns that the new measures, intended to ensure that mortgage applicants will be able to keep up their repayments, could result in some credit-worthy people being turned down as a result of inflexible computer-generated decisions based on their responses to questions about their spending.
The Ipswich Building Society says that potential “misfit” applications include those earning less than £25,000 per year, small business owners, the self-employed and those who have non-standard income sources such as pensions, equity in a business or property, rental income and investments.
However, the society says it will retain its existing methods of verifying income and will use an applicant’s own evidence of spending rather than relying on a computer model to determine what “typical” spending looks like.
Paul Winter, chief executive of the Ipswich Building Society, said: “It is entirely appropriate that the FCA wishes to introduce regulation to ensure the lending excesses of pre-2008 are not repeated and that irresponsible lending is firmly tackled.
“However, I am concerned that people on average incomes may now find it harder to obtain a mortgage and I believe this may prove to be an unintended consequence of the methods used to implement affordability requirements.
“Ipswich Building Society has always manually underwritten and carefully reviewed the financial situation of our mortgage applicants. This is confirmed by our lower than industry average arrears levels.
“Previously acceptable borrowers may now struggle to pass the new affordability test if relying completely on computer data to prove expenditure.
“Whilst we cannot change the new affordability model, we will offer borrowers the option to provide their own expenditure evidence rather than relying on a computer model. We hope this will help more people to obtain a home of their own.”
The society says that, in light of the reforms, anyone seekinig to take out a mortgage will now need to consider lifestyle changes well ahead of their application, not only saving for a deposit but checking their levels of credit, reducing any debts and reducing general spending habits.
However, Mr Winter said that Ministers also needed to take action. “The Government needs to address housing supply issues rather than potentially limiting those on average incomes from obtaining a mortgage,” he added. “Many aspirational home owners are facing a double lock: unavailable lending and a lack of homes to choose from.”