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Mortgage Regulation

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Making Sure you Account For Everything When You Apply

There is plenty to be upbeat about in the current financial climate; unemployment is falling and, miraculously, so is inflation. New confidence in the housing market has developed as a result of the government’s Help to Buy policy and new mortgage applications are at a new high.

Whilst all of this is undoubtedly good news, new rules designed to prevent an unsustainable housing boom have been introduced, ensuring that house buyers will have to prove every penny of income and account for every penny of outgoings. If you are looking for a new mortgage, being prudent with your spending is the name of the game.

Since April 26th, mortgage affordability became strictly regulated; one of the main instabilities in the housing market in the years up to the 2008 crash was the ‘never, never’ approach that some borrowers took when taking out home loans.

In a market that seemed to inexorably rise month on month, year on year from about 1998 onwards, it seemed to make sense to the banks and to borrowers to lend three, four and sometimes even five times salary. If borrowers couldn’t pay, they could always downsize again with a chunk of equity from the property’s inflated market value to reinvest with.

The result, as we all now know, was a housing bubble of spectacular proportions, negative equity, unsustainable personal debt levels, and a very painful half decade long readjustment of the market. This is hardly an experience that the nation is keen to repeat, but without sensible controls over lending, history might repeat itself as the economy moves from recovery to boom.

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So what will all this mean to mortgage applicants in the next few years?

It will mean that personal debt in all its various forms will need to be paid off before you consider filling out the paperwork. Overdrafts, car loans, credit cards and hire purchase agreements could spell doom for applications and ‘over-committed’ borrowers will be declined.

Lenders will want to see a monthly amount of disposable income each month so luxuries like gym membership and any other monthly expense that can loosely be described as ‘fun’ are affordable only once the loan repayments have been met.

The pay off for borrowers who make sure their credit profiles are perfect will be considerable. Just as the government is cracking down on irresponsible lending to financially struggling borrowers, they are also allowing those with the means to pay to borrow far more.

In a recent article in The Guardian it was revealed that couples and single borrowers with the right credit history might be able to borrow up to five times their salary. This might seem wildly contradictory, given the government’s concerns about a housing bubble, but by strictly vetting mortgage applicants, careful borrowers will be rewarded and will also be less likely to default in difficult times.

Some people have predicted that borrower’s who spend nothing other than on the bare essentials, avoid holidays or trips, and who then become semi-self sufficient could borrow even more. Certainly, if borrowers poured all their money into property, it would undoubtedly make them attractive propositions to banks and building societies.

These new borrowing regulations are designed to prevent one kind of financial madness, so it is important not to engage in a different one. If you are planning to tighten your belt, you should seek some independent financial advice and make prudent, sensible, and above all sustainable cut backs which won’t damage your quality of life into the bargain.

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