The news has been full this week with story about the tougher new rules for people applying to take out a mortgage.
There’s been some consternation at the idea that lenders might want to know how much people spend on toiletries or gym membership. These are, it seems to be emerging in the comments from banks and building societies about how the Mortgage Market Review rules will work, extreme examples of a concern to encourage putative borrowers to properly account for their discretionary spending.
Buying a home is generally the biggest personal financial commitment most people make. It’s widely acknowledged that some lenders were irresponsible in the multiples of salary on which they would lend in the past.
Now, with the Financial Conduct Authority shaking up the banking industry, affordability has become the watchword.
Homebuyers even face a stress test, a phrase usually associated with the solvency checks on banks, to see if they can afford repayments on their loan in the event that interest rates rise. The figure being applied is 7%, almost double the rate most people are paying on their home loans today.
And it’s worth noting that when people are asked how much they owe on credit cards, that the rates on these are well in excess of 7%, and when they go up, the impact on people’s outgoings could be quite considerable.
What housebuyers are being asked to do is to look to the long term when they take out a mortgage, to figure out how this fits into their life plans and planning for old age.
There is some concern that the too strict application of the new rules will bring the housing market recovery to a grinding halt. But lenders have been phasing in their new procedures, so it’s more likely to be sellers pricing themselves out of the market that pricks any bubble.
Business people might wonder if this talk of mortgages and personal affordability matters to them, but I think there’s a lesson for anyone contemplating taking on a substantial loan. This is especially so if the rate charged is variable.
How would your business suffer if interest rates were raised? Is there discretionary spending that you can trim? Are you controlling cash flow as thoroughly as you might?
It may seem odd when the economy is recovering and businesses are picking up more work or orders. But the time is approaching when the Bank of England will have to implement a base rate increase that will trigger increases across the range of financial services products.
One silver lining, when normal service is restored to interest rates this will improve the return on any personal savings or business reserves.
Meanwhile, at SJ Collections we are able to provide credit control and credit vetting assistance, as well as debt collection services, to help businesses keep their finances healthy.