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12:25 PM, 17th April 2014, About 10 years ago 13
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For those of you who, like me, are involved professionally with mortgages, the spectre of MMR, or Mortgage Market Review as it is more correctly known, is finally about to hit home.
For the interest of everyone else who is not professionally involved with mortgages, MMR is the FSA’s (and now the FCA’s) baby, which is, primarily, going to ensure that the UK mortgage market works more effectively for residential purchasers, ie, for people buying their own home, aka ‘owner occupiers’.
So, on the face of it, MMR should not affect the Buy to Let Market; or so you would think.
In a nutshell, one of the MMR’s chief points will be to seek to match people’s actual spending habits more closely to mortgage underwriting.
This could include such banal questions as “How much do you spend on your pets?” and one lender is asking “how much do you spend on furniture?”. In short, borrowers spending is known being scrutinised to the nth degree.
Now, this can all be viewed in various ways, one being that “it’s about time that lenders stopped lending to those who cannot afford it” although that’s not always the case of course, and yet another balanced view is “I know I can afford it, my rent is more than the mortgage payment is going to be” and there have been a variety of other emotive comments made throughout the professional and borrowing community. Whichever side of the scales you fall on, if you are a mortgage borrower, the ramifications of the new rules will hit home with you too.
Another of the aims of MMR will be that all but the most simple mortgage product changes, will have to be done on an advised, rather than an execution only basis.
How many borrowers currently believe that when they go to their bank that they are getting ‘advice’? Wrong! Banks do not provide advice, they give product information. But how many people bought a mortgage product thinking they were properly advised? This is all going to change because now the bank salespeople (not ‘advisers’) are going to have to be trained and get qualified. Even then though, they will still only sell their bank’s products and won’t be ‘whole of market’.
An absolute game changer with the staff – and customers – of High Street banks. There is already a lengthy wait to see the bank mortgage consultant, but the additional workload is going to be enormous for them.
As you probably know, residential mortgages were first regulated in 2004 by the FSA, and BTL was deliberately kept outside of regulation. This was because of the nature of it, ie, an investment product for the more sophisticated borrower rather than someone who is buying to put a roof over their head. Despite the aims of MMR being for residential lending only, there will be repercussions for the BTL investor too, whether experienced or not.
There has always been a bit of a grey area where regulation of BTL’s are concerned. I think that it is quite well known that BTL’s are not designed for the owner or their families to occupy, but the lenders did accept that there may be situations where this type of letting may occur. Take dependant relatives, for example. Since mortgage regulation in 2004, there have been lenders who have offered “Regulated BTL mortgages”. Generally, these products allowed relatives/close family members to occupy BTL property. However, with the increased regulation, some BTL lenders do not have the appetite for the additional workload and have simply withdrawn from the regulated BTL market.
This has also spilled over into the Commercial Mortgage market too. Some lenders who offered Owner Occupier mixed use property, such as live/work units (flats over a shop, where the mortgage holder also lives) have withdrawn from that market. Decreased availability will inevitably lead to less competition, which will equal higher costs.
Indirectly, there will be consequences for the BTL landlord too. The atmosphere at the FCA is one of a more prudent market where lenders do not lend irresponsibly. This has already led to a tightening of criteria. You only have to look at The Mortgage Works change of criteria last week, where they will no longer lend to anyone over the age of 70 at application.
One further general change in criteria has also hit the BTL borrower. The lenders are now more canny when assessing a lending request where the proposed borrower does not have a residential property of their own. The fear is that borrowers will try and arrange a BTL mortgage, which is easier to obtain (as it effectively sidesteps the stricter income evidence requirements) and move in to the property themselves. This tightening of criteria has been happening over a period of months as the consultation period with industry has progressed. And again, a major lender has changed their criteria in just the last week, with BM Solutions now removing first time BTL’ers from their list of acceptable applicants
So, although MMR is not aimed at the BTL market, it has, and will affect you more than you realise!
Now, more than ever, working closely with a professional, whole of market mortgage Adviser, is crucial to the success of getting all types of applications through.
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Neil Patterson
12:37 PM, 17th April 2014, About 10 years ago
Hi John,
Do you see MMR in the long run the way I do of going Old school and only lending people what they can afford and that ultimately when things settle down it could be a good thing?
Howard Reuben Cert CII (MP) CeRER
13:28 PM, 17th April 2014, About 10 years ago
Hi Neil
I agree - firstly though, no one likes change and this is a massive change that will take some getting used to. But then, it will be 'the way it is' and we will all fall in line with the new requirements, as we always do, and always will. The alternative, of course is to try and 'game play' around the rules, but of course those borrowers (and brokers / salesmen) who try and cut corners will (and do) be found out.
The MMR is such a big change that Brokers are going through a lot of new training at the moment with several workshops and training sessions already done and some still more to do. Lenders only have to train their own sales staff of their own new rules and products, but of course the professional whole of market Broker needs to know all lenders rules and new systems.
And this is part of the (massive) problem that we all face.
The FCA has NOT implemented new legislation as such. What they have published is a rulebook of guidelines and every single individual lender can (and will) interpret these rules for their own internal requirements.
The MMR is a single acronym, but it means a multitude of different things depending on who the lender is.
The borrower will need professional advice now more than at any time in the past.
And speaking for my Firm alone, we're here (experienced, professional and trained) to help.
Howard
John Constant
14:35 PM, 17th April 2014, About 10 years ago
Reply to the comment left by "Neil Patterson" at "17/04/2014 - 12:37":
Neil, I believe that these changes are changes for the better for all borrowers now.
I know what you mean about "Old School", ie responsible lending from a bank manager who knows your circumstances, but even "Old School" had its problems, such as rigid income multiples; how was it fair that someone who was married with 3 kids could borrow the same amount of money as a single person with no responsibilities, for example?
This is an advanced "Old School" if you like, that is more attuned to the borrowers circumstances, in a way that the simplistic 3.5 +1 x salary never was. There's no doubt that there will be winners and losers on the residential side, and I have no doubt that the losers will be very vocal. Some lenders models can only lend 2 times salary for some people.
Looking at the bigger picture, MMR is seeking to protect the market against the situation that we had in 2008, that contributed to the Credit Crunch. As important as it is, MMR is not just about Affordability There are other aspects too, such as the formal death knell for Self-Cert mortgages and special measures for multiple high risk lending, such as High LTV coupled with adverse credit, for example that my article did not touch on. On the whole, I believe that the public will broadly welcome the changes that have been introduced, as long as they know the facts, and do not believe all that they read in the newspapers!
Neil Patterson
14:50 PM, 17th April 2014, About 10 years ago
Reply to the comment left by "John Constant" at "17/04/2014 - 14:35":
Ah more like Old School Old School when I had to be grilled by my Branch manager before my first £42,500 mortgage.
In theory it does make sense to me.
Neil Patterson
14:52 PM, 17th April 2014, About 10 years ago
Do you think there will be any other changes in Criteria for Buy to Let still to come and have you heard any rumors?
John Constant
15:06 PM, 17th April 2014, About 10 years ago
Reply to the comment left by "Neil Patterson" at "17/04/2014 - 14:52":
Neil, as Howard says in his post above, the FCA publish "guidance" to lenders, and expect them to make the necessary interpretations. Therefore, it will probably be a case of "Watch this space...." regarding any future changes. Who knows how some lenders may interpret the guidance.....?
TERRY BROOKES
16:31 PM, 17th April 2014, About 10 years ago
just going back to the question of letting to close relatives,why are the lenders so against this,as long as they are paying the right amount of rent does it matter who pays it,and what would be the consequenses if this situation came to light.thanks.
Jeremy Smith
18:10 PM, 17th April 2014, About 10 years ago
Who is this new MMR innoculating against whom ? bank vs public
It seems it’s the banks against us borrowing too much, so they don’t get hurt.
These new tests are aptly named, don’t you think ?
John Constant
18:16 PM, 17th April 2014, About 10 years ago
Reply to the comment left by "TERRY BROOKES" at "17/04/2014 - 16:31":
Terry, lets consider the difference between a residential mortgage and a BTL mortgage.
As you know, BTL mortgages, do not rely upon a persons personal income (apart from minimum income requirement of around £25,000 required by the majority of lenders). Residential mortgages, on the other hand, are based solely on the earned income by the purchasers, living at the property. If lenders allowed close relatives to live in a BTL property, you will have husbands living in wife's property (likewise with partners), children living in parents property etc etc. Remember, these properties are deemed as Investment Properties, based on the rental income, and the lenders expect that income to be received to pay the mortgage.
Not all families play by the rules though. Inevitably, you will have some "family tenants" taking advantage of the "close family landlords", and not paying all or some of the rent due. Arrears would build up, and the lender would have no choice but to repossess the property. This might be a cynical view, but I believe, that it is one that the lenders adopt.
Furthermore, from the FCA's point of view, easy mortgage credit made things difficult for their forerunner, the FSA. Suggestions were made that easy credit, (such as Self Cert, Interest Only residential mortgages and slack BTL regulations) contributed to the problems that we now appreciate from 2008 onwards.
John Constant
18:24 PM, 17th April 2014, About 10 years ago
Reply to the comment left by "Jeremy Smith" at "17/04/2014 - 18:10":
Jeremy, this is not a clamp down on borrowing for all. It is a clamp down on lending to risky situations that contributed to the credit crunch. This consultation process on MMR started in 2009, when the causes of the catastrophic financial melt down became evident.
You need to understand that for some borrowers, the amount that they can borrow has increased. But this is all based on affordability. This is based on the amount of free income after a realistic budget has been established.