18:10 PM, 16th April 2014, About 10 years ago 8
Are the forthcoming Mortgage Market Review (MMR) affordability criteria about to play into the hands of the PRS?
Well, yes it will for some of us and no it will not for the majority of us!
I’ve been thinking about this for a while now and some interesting points were made in a recent article on this site last month.
In lots of areas around the country the housing market seems to be quite buoyant at present, especially when looking at average 3/4 bed family type home sales, but in other areas the upturn still hasn’t really taken hold yet because unemployment is still higher than average and the recession has still got a grip on those struggling local economies.
When the MMR starts to bite hard, post 26th April 2014, when people realise that they won’t be offered the residential mortgage they needed to upsize or even as a first time buy, they will stay put and we may see the return of instability within the housing market once again. If there is instability and stagnation due to stricter lending then new house construction will probably also come to a grinding halt as well.
People are saying that the new in depth MMR affordability checks will be a return to sensible lending with income multipliers a thing of the past and affordability top of the consideration list. In fact it has gone well beyond sensible – it is in most cases a computer programme that for a lot of people will mean virtual impossibility to borrow anything worthwhile. It won’t be a return to sitting down with your friendly bank manager and carefully considering all the pros and cons, in fact some lenders are even placing a “what if” interest rate rise scenario in their calculations with a testing 7% to cover rate rises that they expect over the next five years. This is despite most analysts predicting over that time period a more likely rate of 3% as a worst case scenario. Either way, those potential house up-sizers that are basing their affordability on the continued press reports of rocketing house prices and wage rises above inflation will need to take a reality check.
If you doubt me just put some details through your mortgage lenders affordability calculator to see what you come up with. Try a few different ones. You will be amused at how little you will be able to borrow. I was and if like me you thought the online calculator was just a rough guide you will be shocked to learn that it is a lot more accurate than you thought.
I promptly telephoned my mortgage lender on the basis that my partner and I were intending to move away from the area to purchase a larger and more expensive property. I’m fortunate enough to be in receipt of a guaranteed income in the form of a good pension but my partner would want to look for similar work to that she is currently involved in. Between us we also receive a good income from our rental properties. The advisor asked how much the property was that we were purchasing and how much we wanted to borrow. I explained that we needed to know how much we could borrow before looking at properties or asking price brackets and that we wanted to borrow as much as we could sensibly afford to. This was followed by a long list of further questions that all lenders now have to trawl through and the end result was, “I’m sorry but we cannot lend you anything.” At this point I will just point out that we already have a modest mortgage with the lender, well below the old income multiplier they would have lent us a week ago, but what we would like to borrow is still less than they had previously offered to lend us.
He suggested that my partner would need to guarantee a job offer before applying for a mortgage otherwise her position would be registered on their mortgage system as unemployed, which would result in a refusal to lend if we apply jointly. I would prefer to find the right house first and then look for a suitable job based on where we know we would be. Doing it the other way around is fraught with danger. He then removed my partner from the equation and after putting me on hold to confer with a colleague, surprisingly he came up with a figure – of £35719!! So on my own it turns out that I am less of a liability?? I didn’t want to buy a second-hand motorhome though, I was thinking more of a 4 bed detached house!
He was aware of our BTL commitments, which were not a concern, contrary to previous enquiries at the time of obtaining our current residential mortgage, but our only other outgoings are day to day living expenses, a small residential mortgage and two life insurance policy payments. Neither of us has any adverse credit history and we have no other debts, loans or credit and everything we own is paid for. We have a six figure sum invested in a managed fund, a further six figure sum that we could access instantly and a seven figure sum representing property assets (below the 3 million required to opt out of MMR criteria).
Interestingly we were able to use our property rental income in the application but only if it is shown on our Self-Assessment forms. I thought this wasn’t usually considered so I suddenly felt that we were on to a winner here because we actually have a healthy income from our small portfolio. Unfortunately, what we receive as income every month was outweighed on paper by the losses we are carrying over to the following years’ tax assessment. Our accountant, like most I’m sure, has made the most of all concessions that can be offset against income tax but as a result of three recent purchases, a remortgage and the associated mortgage fees that inevitably go hand in hand with such transactions, our losses have been bolstered and we still have a sum to carry over. I explained to the advisor that this is somewhat artificial as we haven’t paid those fees directly out of our pockets but they were added to the mortgages but in the circumstances, together with everything else, it doesn’t paint a good picture. I had already given him the total rental income and total mortgage costs of the portfolio, which on its own looked very good. “I’m sorry” he said, “but we can only use the figure in the last box on your assessment forms. It’s like a company owner that doesn’t take a salary but gets paid in dividends. They are in the same boat. We can’t lend to them either….” I have heard this somewhere before!
So other than the very rich, who will fly below the MMR radar and those that wish to risk tying up a pile of their own cash, the majority of house purchasers and remortgagers are going to be very restricted by the mortgage market. Based on current asking prices there will need to be some very hard negotiating to bring the price down in line with what the mortgage lenders are going to offer prospective buyers. So, unless you are downsizing (in price) home buying for most of us is about to get tough again.
What does this ultimately mean? Well, if masses of people suddenly find that they cannot borrow enough money to buy what they reasonably thought they could afford then something has to give. And that can only mean one thing – house values are about to go south once again and that will be especially hard for those in areas that have struggled to come out of the worst downturn we have ever witnessed in our lifetimes.
If sellers won’t budge on asking prices then stagnation will occur. If sellers drop their asking prices then this will have a knock-on effect and prices will drop across the board. Those people that have to move but cannot afford to sell their own home at a lower price or can’t persuade sellers to drop their prices to be able to afford to buy will inevitably look towards the rental market. Similarly, all those first time buyers will suddenly find that basic salaries, child care costs, HP, credit card debt and yes, student loans, will prompt the inevitable – “computer says no”.
This may be a recipe for pound note signs in the eyes of those landlords with their unencumbered portfolios but for the majority of us looking for long-term growth with BTL mortgage debt ending in a string of zeros we were just getting used to the idea of the prospect of rising values at long last but it appears we may have to prolong that for just a little longer.
So unless this new lending criteria is quickly relaxed property values could be going the wrong way for the foreseeable future, which coupled with interest rates and mortgage payments going up in the next year or so, before we know it landlords could be staring down the barrel of negative equity once again.
I appreciate I may have taken a negative and blinkered view on the subject so I would be pleased to hear any positive spin on the subject from those who are familiar with what MMR entails.
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