Since June 2017, applying for a mortgage has got harder and fewer new mortgages have been approved. What has changed and why? And how will this affect those doctors and dentists wanting to remortgage or get a new mortgage this year?
Why is it now harder to apply for and get a mortgage?
The Bank of England’s (BoE) June 2017 Financial Stability Report stated that mortgage debt has always been a significant risk to financial and economic stability¹. As a result, it recommended a new ‘stress test’ that assesses whether or not a borrower can still afford their mortgage at the end of their mortgage deal.
When your mortgage deal comes to an end, if you don’t immediately remortgage you automatically go on to what’s called a reversionary rate. This reversionary rate is normally the lender’s Standard Variable Rate (SVR).
Instead of assessing your affordability against just the SVR, the BoE’s recommendation now requires mortgage lenders to stress test your affordability against the lender’s SVR plus an additional 3%!
How does this affect you getting a mortgage?
Some lenders’ SVRs are higher than you might think. If your preferred mortgage lender’s SVR is 4.74%² – as some currently are – then your mortgage will now only be approved if you can afford to repay your debt at a rate of 7.74%!
Bear in mind too that if the Bank of England raises its base rate again, mortgage lenders will likely follow suit, swiftly raising their SVR and making these example percentages even higher!
According to Reuters, UK mortgage lenders approved fewer mortgages in December 2017 than they have in nearly 3 years³. Of course, it’s impossible to know if this is down to the Bank of England raising its base rate to 0.5% last November, or the new affordability stress test. Either way, the two combined are putting a downward pressure on mortgage borrowing levels.
If you’re planning on applying for a new mortgage this year, what should you do?
If you are hoping to remortgage or buy a house this year you may have a nasty shock in store. You’d certainly be wise to start planning earlier to allow extra time for difficulties along the way.
You also want to make sure that you find the right lender and the best deal for you. Lenders’ SVRs vary; so too do the calculation methods they use to test your affordability. Not all lenders take into account the same costs for example.
The process is complicated enough but if you have multiple income sources – as some medics do – or you receive maintenance payments following a divorce, you want these to be included in your income.
If you’re a self-employed doctor or dentist, especially one with less than 2 or 3 years accounts, things can get even trickier.
Fear not! For we, at Legal & Medical, are on hand to guide you through the process, select the most suitable lenders from the whole market and work with them, on your behalf, to get you the mortgage that’s right for you.
Ideally, you need to contact us 3 months before you want to remortgage or buy your new home. This gives us plenty of time to set in place a solid process and outcome for you. Of course, if you hadn’t planned on falling in love with the house of your dreams and need to move fast, pick up the phone and we will be happy to help!
And don’t forget, your home may be repossessed if you do not keep up repayments on your mortgage.
Were you aware of the new affordability stress test that’s now required to get a mortgage? Let us know by adding a comment below.