Mortgage Market Review: how it affects contractors
They represent the biggest change to the mortgage market in over a decade and are behind some alarmist headlines, but the new Mortgage Market Review (MMR) rules that took effect on April 26th 2014 are, overall, a positive for contractors, writes Tony Harris of IFA ContractorMoney.
While the scare stories are not justified, the changes are indeed significant for contractors who apply for a mortgage, as the Council for Mortgage Lenders, and the Financial Conduct Authority (which drew them up), have recognised.
They are also significant for lenders, mortgage brokers and financial advisers which, in a nod to their far-reaching consequences, have each been implementing changes to their systems over the last few months.
That should help towards a seamless introduction of the rules -- designed to improve consumer protection and encourage responsible lending -- but their bedding down will be even smoother if contractors, and mortgage applicants as a whole, have some guidance on what 'MMR' might mean for them.
The Importance of Advice
One of the key distinctions from now on will be to differentiate those mortgages that are arranged on an “advised” basis, and those that are “execution-only”. In the past, lenders and some financial advisory firms have not been required to employ qualified mortgage advisers and have been able to justify this by stating to the regulator that they are merely “executing” the transaction, even though the applicant may have been under the impression that they were receiving advice. Post-MMR, almost all mortgages will be advised and there are very few instances where “execution-only” can be used.
Top Tip: Ask your adviser’s qualifications at the outset to avoid wasting time. If they don’t have the CII or IFS Certificates of Mortgage Advice, then they can’t help you and will have to refer to another adviser.
The Mortgage Process
Under MMR, mortgage interviews may take far longer to complete as advisers will need to gather more information to determine affordability and decide which mortgage product is most suited to your requirements. If you go direct to a high street branch or via a traditional estate agent it is estimated this may take as long as two to three hours.
Top Tip: A good online broker should be able to substantially streamline this whole process and work around your schedule by using phone, email and post.
Since Saturday, lenders will now be required to ensure that the mortgage is affordable if interest rates increase, stress-testing affordability, for example, at a 7% interest rate. This will help give potential homeowners confidence in their ability to afford their mortgage now and in the future.
Top Tip: Your mortgage adviser should already have been carrying out this exercise before it was mandatory, but there a variety of mortgage calculators online that should enable you to carry out your own stress-test.
The assessment process will be far more detailed as you, the customer, will be required to support your application with appropriate income evidence. Thanks to lobbying efforts on behalf of freelancers, contractors and other self-employed individuals should still be able to secure a mortgage using their contract and bank statements alone. However if such independent workers approach many lenders directly, the lender will want to see three months of payslips, 2-3 years of company accounts, or SA302s. Confusion from the lender surrounding your unique employment status could increasingly cause problems.
Top Tip: Securing an agreement in principle before you go house-hunting should pre-empt any unforeseen problems caused by any tightening of affordability criteria.
A Holistic Approach
As a would-be borrower in this MMR era, expect the lender to ask questions about potential changes to your income or expenditure. The idea behind MMR is for lenders and advisers to take a more holistic approach to your mortgage, so they will want to understand the reasons why a particular product is best suited to your needs and will remain affordable.
Top Tip: Avoid lengthy gaps between contracts if you intend to apply for a mortgage soon afterwards. Even contractor-friendly lenders are increasingly wary of those with more than 4-6 weeks out of work each year.
Post MMR, many advisers are likely to introduce fees, if they have not already done so, in order to cover the extra costs associated with the more thorough advice process that is being demanded by the FCA. However there is no requirement under the new rules to charge these extra fees, as all brokers will continue to receive commission from the lender that you choose.
Top Tip: Always ensure that you ask at the outset what fees will be charged by your adviser, while keeping in mind that specialist advisers won’t charge a fee for their advice or for the processing of your mortgage. Getting on board with such a specialist could save you more than £500 at what is bound to already be an expensive time.
MMR: a positive change or something that won’t make a difference?
Greater regulation of the mortgage market has got to be a good thing. Buying a home is invariably the most important financial decision we take in life. So it has to be a positive that lenders will be looking more closely at borrowers’ ability to repay. It’s also to be welcomed that the regulator has seen the value in borrowers being properly advised before they take on such a big commitment.
These rules come as the UK faces a major challenge around the area of interest-only borrowing. In the past, borrowers could contact their existing lender direct, with little or no questions asked regarding their repayment vehicles. Post-MMR, homeowners are far more likely to obtain an independent review of their circumstances, at least enabling a discussion around the potential pitfalls of interest-only and the alternatives available.
We believe that MMR is ultimately positive for the contractor community, as it means greater consistency in how your mortgage affordability is assessed and it lets you rest assured that your mortgage will be appropriate to your individual circumstances. There shouldn’t be any new problems with regards to securing contractor mortgages under MMR either, because most lenders and specialist advisers have implemented the necessary changes to processes long ago, meaning they have been submitting ‘MMR ready’ cases for a number of months now.
Editor's Note: For more specialist advice and information on contractor mortgages please click here.