The MMR (Mortgage Market Review) aims to toughen up financial viability checks for every consumer applying for a mortgage from 26th April.
As well as a forensic examination of consumer suitability for a loan, the review also targets the conduct of lenders by stipulating that all mortgage sales must be based on expert financial advice rather than simply offering a choice to clients.
Basically, this comprehensive review aims to eliminate just one thing: Vulnerability.
Weak spots are not to be tolerated under MMR. The financial sector must never again jeopardise the economy with wide-spread bad debt. That chain begins with the consumer and lenders must now act as gatekeepers.
How will they do this?
We have heard of “stress tests” on banks and businesses before, where systems are targeted by hypothetical threats to see how well they will cope.
Now consumers will face stress tests of their own and all mortgage applications will delve deep into their personal spending.
Of course many consumers who have already opted for expert financial advice for their mortgage decisions will be used to the process of full disclosure. They will also be used to a longer application process.
These clients have gone through their finances with a fine toothed comb in order to get the most suitable mortgage deal on the market and have taken advice from brokers who are experts in their field. This includes everything from house-hold bills and groceries to credit cards and online bingo. Phone bills, child care, travel costs. Every monthly bill is included to ensure that the right mortgage is pin-pointed.
The difference come April 26th will be that consumers will need to evidence their ability to pay the mortgage currently and also in the future under various different circumstances. How will an interest rate rise affect your ability to pay? Your child is going to university next year – how will that impact your outgoings? What happens when your fixed rate energy bill comes to an end? What happens if you are made redundant?
Naturally many consumers are worried that they may be offered a smaller loan as a result of MMR than they would have been before these stress tests were carried out. Some also have jitters about what they see as an invasion of their privacy.
The uncomfortable truth is that although these concerns are valid, it is a healthy financial habit to review your outgoings periodically and to ensure that there are no potential pit-falls lurking around the corner.
You have to balance the books. A smaller loan that is repayable in the future may be more suitable than a larger loan that is insurmountable due to a change in circumstances such as interest rates or a major life event such as retirement.
Borrowers may find they need to produce more paperwork than previously required to back up what they say about their income and spending. Evidence may be necessary for overtime or bonuses not included on payslips. Statements may be requested from employers verifying any irregular income. Income from investment or rental properties will also require documentation.
Of course the jitters are not only being felt by consumers. The industry is nervously anticipating what the impact of MMR will be.
Some experts are predicting higher rates in reaction to the longer application process and a decreased influx of mortgage applications.
However the industry has had years to prepare for these changes and most predict a smooth transition. Now consumers must do the same. Forensic financial examination and assessment is something that all consumers are going to have to get used to when they come to buy a home for the first time or remortgage. Large borrowings come with large responsibility and everyone needs to prove that they are taking due care and attention to get onto the books of the lenders.