Mortgage Market Review – winners and losers
Andrea Kirkby explores the impact of the The Mortgage Market Review which changes the way a borrower’s firepower is calculated.
The recommendations of the Mortgage Market Review (MMR) come into effect on 26th April, bringing in a new way of calculating borrowers’ firepower, as well as making various other changes to the market.
Although it’s the use of an affordability formula rather than salary multiples which has made the news, MMR has a much wider remit. The review was launched in the wake of the credit crunch, and one of its aims is to prevent the sort of imprudent lending that led to numerous bank and building society near-collapses as the market stalled in 2007-8. Perhaps the biggest change is that almost all retail mortgages now need to be sold on an advised basis, by a qualified person. As well as introducing an affordability formula that considers applicants’ outgoings as well as their income, the new regime requires ‘stress testing’ – assessing whether borrowers can cope with a possible increase in interest rates. But it doesn’t – interestingly enough, given Bank of England Governor Mark Carney’s comments on the housing boom – include any restrictions on loan to value, and there are no age restrictions, either. And although self-cert has been outlawed, interest-only mortgages have not been banned – though borrowers need to show exactly how the loan will be repaid.
READY FOR CHANGE
This may all sound rather dramatic, but brokers and lenders have had plenty of notice. David Hollingworth at brokers London Country says, “In many ways we are already in a market operating under the rules that the MMR will implement.”
Besides, tightening up lending criteria is something that lenders, not just the regulator, wanted to do. “Lenders adapted to an MMR world five years ago,” says Ray Boulger

, Senior Technical Manager at John Charcol, in fact, some are now stricter than the MMR requires.
The outgoings side of the affordability formula is being more strictly policed.
“Lenders are asking for more information on expenditure,” he says, and looking for more evidence such as bank statements. But they don’t necessarily believe applicants – they will compare what borrowers tell them with figures from the Office of National Statistics, and generally take the higher of the two.
The stress test is also being applied already, with most lenders using a 7 to 7.5 per cent rate. Boulger explains, “That’s based on a five-year-forward sterling rate plus the lender’s SVR.”
In terms of processes, most lenders are claiming that they are ready, including having made changes to their IT systems to hold all the information required for compliance. But Ray Boulger suspects some are still scared of what will happen once their new processes go live. He says he’s seen a few lenders pushing their fixed rates up recently, “and it’s hard to resist the conclusion that they’re trying to damp down the amount of business.”
TAKING ADVICE
The requirement for almost all mortgage sales to be advised – including remortgages – is a big change. Even if consumers just want to walk into their local branch and get a basic repayment mortgage off the shelf, they won’t be allowed to (only high net worth customers are excluded from this requirement) – oddly, they will be able to apply via the internet without advice. When the Intermediary Mortgage Lenders Association surveyed lenders, 57 per cent were worried that they didn’t have enough qualified advisers, so it’s likely that some lenders won’t have enough capacity to handle business over the transition period, and so they’re trying to dampen demand.
That could allow brokers to take an increasing share of mortgage business.

Alastair McKee, director of One 77 Mortgages, says, “Lots of lenders are up against it at the moment in terms of getting ready in time. Their pain is mainly felt in the branches where, post MMR, lenders won’t be able to carry out execution only cases, and everything will be advice based. As a result, the branches do not have enough CEMAP qualified advisors in branch to satisfy demand, and therefore the pendulum of business will swing in the brokers favour over the next few months as that’s the only way lenders can reach their lending targets.”
However, if lenders push too much work to brokers, there could be a capacity crunch in the intermediary channel too.
WOBBLES AHEAD
It’s likely, then, that the next few months will see volatile mortgage pricing, possibly with frequent changes of product offering from the high street lenders, as well as delays in securing mortgages. (David Hollingworth says the average time taken to secure a loan has already doubled, from two to four weeks, as a result of more stringent checks.) Credit requirements could also be varied to manage demand, Alastair McKee believes, “Lenders who don’t have the capacity to deal with large volumes of business will, as a result, make their credit scores harder to pass or will tweak their criteria to make it harder for people to fit with that lender whilst they adjust to MMR.” That’s not going to be any consolation to borrowers who would have made the cut a week before but lose their mortgage due to a ‘tweak.’ No wonder the Council of Mortgage Lenders has warned of “wobbles” as the new regulations come in.
WINNERS AND LOSERS
There have been concerns that the new rules could sideline some borrowers. For instance, tighter requirements for proof of income could hurt the self-employed, several lenders (Lloyds, Nationwide, Woolwich) are now asking for the applicant’s tax statements rather than business accounts. Those on flexible contracts – even if they have good credit histories – could also have major problems securing finance.
On the other hand, Ray Boulger believes some buyers could now take advantage of longer mortgage terms to opt for a 30-35 year mortgage. Because the affordability formula is based on monthly mortgage costs, that will allow them to borrow more. “Most people,” he asserts, “will still get what they want.”
There’s a tiny “Easter egg” for borrowers on the way, as Boulger says, “The FCA has a bee in its bonnet about arrangement fees.” He thinks lenders may come up with more fee-free products, which given the seemingly irresistible rise of fees from an average £299 to nearer £1,000 over the past few years, is something of a relief – though of course, the interest rate on such products will be a tad higher.
Alastair McKee, too, says he thinks most borrowers will be able to secure funds. “I think there will be a few people that will fall foul of the new affordability rules,” he admits, “but not a huge amount. Initially during April and May we may see a surge in declines from lenders but after that I expect it to settle down again.” He points out that most lenders have ambitious lending targets for 2014, the market is expected to be worth over £200 billion – still below its £360 billion peak, but well ahead of its £130 billion trough.
One problem with the affordability formula is that it’s not as quick and easy as salary multiples to explain. (Ray Boulger says he generally translates the affordability criteria back into an income multiple for ease of reference.) That could make checking applicants’ creditworthiness tricky.
But Alastair McKee says many lenders now have affordability calculators up on their websites, “and any broker worth their salt will also be running the affordability models to make sure cases fit before submitting the business to them.” However, there are many nuances in the ways different lenders apply the criteria, which means brokers will be earning their money navigating this particular maze.
MARKET IMPACT
The big question is whether the implementation of the MMR will have any impact on the overall housing market. But given that there’s little, if anything, new in the affordability criteria, the answer is probably not. Funding for Lending and Help to Buy, rather than mortgage affordability, have been the main impetus behind the recent rise in house prices. Low interest rates have also helped, and any upwards move in rates would have a more negative effect on the market than a few hundred mortgages declined as a result of the MMR.
So we can hope that April 26th will pass with only a few glitches. None the less, estate agents do need to be prepared for some disruption over the transition period, particularly since it’s happening at what’s always a busy time of year in the housing market (whose idea was that date, anyway?) Some mortgage offers could fall through, and chains could look rather stretched as applicants take longer to get mortgage decisions. Cash buyers will be at an advantage – as, of course, they have been ever since 2007.
The real importance of the MMR will only be seen in the longer term. As Ray Boulger notes, “What the MMR’s really doing is preventing lenders loosening their criteria as the market recovers.” Although there’s no limit on loan to value, the tight regulations on affordability will stop lenders chasing rising house prices with increasingly perilous lending – and though it seems unlikely we’ll ever completely eradicate boom and bust in the housing market; that could lead to more sustainable, if lower, growth.