Mortgage blog: New lending rules set to result in a huge increase in ‘mortgage prisoners’
Strict new mortgage lending rules which came into force this April could result in thousands more ‘mortgage prisoners' according to a property expert. New regulations which require lenders to prove that borrowers can repay their new mortgage could leave many thousands of homeowners trapped with their current lender and unable to remortgage - even if they have been paying their home loan for years.
We look at how the new rules could impact on your chances of getting a remortgage.
New rules apply to remortgage borrowers as well as homebuyers
The changes to lending rules came into force in April and require lenders to go into forensic detail your household finances. You will now have to discuss every aspect of your spending from your household bills to gym memberships and eating out. You will also have to prove that you will still be able to afford your mortgage if interest rates rise to around 7%.
Crucially, these affordability tests will happen not just when you buy your first home, but each time you move and even when remortgaging.
Keith Osborne, editor of whathouse.co.uk, says: "The theory is that stricter affordability checks will prevent a repeat of the irresponsible lending that went on before the global financial crisis. However, the regulations could actually result in thousands of responsible borrowers - those who have been paying their mortgages - being refused new loans, thus increasing the number of so-called ‘mortgage prisoners'.
"Even if you have a clean repayment record you could find that you fail the new checks, meaning you could be stuck on your lender's Standard Variable Rate rather than being able to secure a better deal elsewhere. The irony is, of course, that being stuck with your current lender could actually be more expensive - and less affordable - than remortgaging to another bank or building society."
Interest-only borrowers could find themselves the most badly affected by the new rules. With so few interest-only deals available, they may be forced onto more expensive repayment deals when they move home or they want to remortgage to another lender.
"Even if you've been paying your mortgage without any problems for years you could still find it tough to find a lender prepared to offer you a remortgage," adds Osborne. "Even if you can afford the repayments, tighter credit criteria mean that any blip on your credit record could also be enough to scupper your application."
Many experts believe that the rules may have become too harsh. Daily Telegraph deputy finance editor Dan Hyde concludes: "This latest lending clampdown threatens to swing the pendulum too far to the other extreme."
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