How changes in the mortgage market could change your life
Mortgage Market Review.
Remember those three little words as they are going to change all of our lives forever. Your lives. Your children’s lives and your grandchildren’s lives.
We all know what happened back in 2007 and the start of the credit crunch that has restricted access to lending in a reaction to the over-liberal lending of previous years. Behind the scenes the Financial Services Authority, the City regulator, has been consulting with mortgage lenders and professionals about how to stop some of the crazy lending that had been going on pre-2007 from ever happening again.
But not content with allowing a free market to correct itself, the FSA has gone one step further and what it is proposing at the moment will leave an entire generation without the means to get a mortgage at all. And that will have severe ramifications for the rest of us.
The FSA’s Mortgage Market Review is the regulator’s proposed vaccine for the market but unlike the doctor’s Measles Mumps and Rubella jab, this is one shot in the arm that is going to have a strong adverse effect.
The MMR is all about affordability, in other words, whether you can afford to take on the loan. The FSA wants to put an end to, for example, mortgages that are high loan-to-value, interest-only, self-cert (where borrowers self-certify their own income) as well as fast track deals, where lenders can fast-track an application through their processing because there’s either a large amount of equity already in the property or a hefty deposit of, say, 40%.
Just taking these issues (there are many, many more) the consequences are immense. More than 11 million borrowers will be affected by the MMR in one way or another. The fallout of this regulation, if it is implemented in its current form, will see rafts of borrowers unable to remortgage off their existing self-cert and fast-track deals because they do not have the required proof of income.
Imagine that you have an existing self-cert or fast-track deal at your lender’s Standard Variable Rate (SVR). While interest rates are low your monthly payments are probably affordable. But once rates start to rise, and they will, you are going to be trapped as the lender will not be able to move you onto a better deal as a result of these new regulations.
Regulation can be a good thing. But the unintended consequences of this MMR jab are likely to stifle both innovation for lenders and opportunity for borrowers, potentially leaving hundreds of thousands without the ability to stay in their home or buy another.
Now you might be thinking that this is no bad thing; that it’s about time some of the lending practices of the past should be banned.
But just think about this for a moment. Without a viable alternative, the knock-on effect throughout the housing market and indeed the economy is going to be horrific.
Thinking of selling your home? It’s quite possible that you won’t be able to sell the property in the first place. Housing acts in a chain of events. First-time buyers will be thin on the ground as the need for higher deposits continues and interest-only is banned.
Without a first-time buyer you can’t have a first-time seller; no first-time sellers mean no second-time buyers and no third-time sellers. Think rental accommodation will provide the answer? Think again. Buy-to-let funding is hard to come by and banning interest-only deals will make it impossible for some investors to continue investing in property. Rents will rise dramatically too. As more and more would-be homeowners are denied access to the property market the demand for good rental accommodation will shoot up, and with it rents.
What soon comes into play is a nightmare scenario that will keep you awake at night, your children awake at night and your grandchildren awake at night for years to come.
The good news is that the MMR hasn’t happened yet. But it more than likely will and it won’t be long before the grim reaper comes knocking at the door. Prepare for the worst.