Buyers today are increasingly obsessed with the issue of the new Mortgage Market Review (MMR)
This obsession is now spilling over to the buy to let market, with some folks wondering what implications this will have for ordinary investors.
The new mortgage rules are here. The harm for buy to let will be more imaginary for the moment…here’s why.
Up until now, the initials ‘MMR’ referred to the controversial vaccine for children. But any residential home buyer or owner occupier will now come under the wrath from lenders and brokers alike and this will prove every bit as controversial to owner occupiers applying for a new mortgage as the vaccine was to parents.
The new MMR rules were required in the wake of the financial collapse in 2007/8 where many lenders were criticised for irresponsible lending practices.
Lending without checking the borrowers were employed, had sufficient income to afford mortgage repayments, lending on inflated property valuations especially with higher loan to values.
Also, granting interest only mortgages without showing an alternative vehicle plan to repay the mortgage, as it was widely assumed the borrower would be able to sell the property within a short period, redeem the mortgage and make a substantial profit.
Well we all know what happened there!
These relaxed lending policies caused two big problems:
1) Some Borrowers found themselves severely distressed unable to keep up with mortgage payments especially when rates spiked
2) When the market crashed, the lenders lost out and borrowers were unable to sell their property for anything like what they paid for it
Therefore the new MMR rules are aimed up cleaning up old practices, protecting new borrowers to ensure what they borrow-they-can comfortably afford, regulating activities of brokers and ensuring responsible lending for future borrowers.
Of course, to also ensure the lenders moving forwards don’t get into financial difficulties and making huge losses.
One Step forward, two steps back?
Will the new MMR rules make it tougher for borrowers to get a mortgage?
Particularly first time buyers and the self-employed? Will this impact the recovery meaning it will be harder for borrowers to obtain a satisfactory mortgage making long sales delays? Will it make the market weak in the knees?
Perhaps as any reduction or delays of finance will slow growth as the two new major requirements are the lenders must show they have verified and scrutinised the applicants income AND considered whether the applicant will be able to afford the mortgage payments throughout the lifetime of the mortgage.
What’s the new affordability test?
Lenders will take into account:
- The borrower’s ongoing and committed expenditure
- Borrowers income (net of income tax & national insurance)
- Basic living costs
Affordability will ensure the borrower can afford their monthly payments when interest rates rise which will increase the cost of their outgoings and not put them under undue financial distress.
Proof of income?
No longer will lenders be satisfied if the broker has all the borrower’s income details. Lenders will now opt to have independent evidence and self certification of income will not be possible.
Impact on interest only mortgages
Due to contrary belief, interest only mortgages are permissible under the residential arm, providing the borrower can demonstrate credible means of paying off the loan. This means, endowment policies have now been discredited.
Will buy to let be collateral damage?
Although the MMR is focused on regulated mortgages, there will be ramifications for buy to let borrowers. But not to the extent most think.
Firstly, there may be tougher requirements from brokers and lenders to assess the investors minimum income, greater scrutiny of bank statements, evidence of salary and past copies of statements showing deposit accrual.
Lenders may also change criteria for larger portfolio landlords and limit the number of mortgages they can have with any one lender for fear of over exposure.
Greater scrutiny of buy to let applications & ‘plausibility’ to ensure owner-occupiers with low earnings don’t try to obtain commercial loans for a property they intend to reside in.
The knock on effect will mean genuine buy to let applications may undergoing more stringent checks to stop false applications becoming more common place post MMR.
But of course the reality is that a lot of what the lenders are now asking for they have been doing since 2009-2010 anyway, when the market changed and the regulator indicated that these rules were coming…
The Real Enemy
Is not the MMR, but “hope and regret”. Hope in particular, has no place in any serious property’s investor’s tool kit.
Finding yourself saying “I hope the mortgage market eases out” or “I hope lenders relax their criteria and the MMR doesn’t impact buy to let” is like hoping no one checks your alibi or audits your tax return. It’s a clear indication that you’re already off the rails.
It’s make-believe, in other words. What you need instead is a proven investment strategy that allows you take advantage of the uncertainties inherent in this new mortgage market.
By identifying worthwhile opportunities, sizing your bets, hedging your risk, protecting your profits and preserving your capital… whatever the markets throw at us.
As an investor, the important issue is what insiders are buying and how… and how you can cash in the opportunity. This helps level the playing field to gain your unfair advantage.