Mortgage Market Review: what does it mean for investors?

Mortgage Market Review: what does it mean for investors?

On April 26th of this year, the Financial Services Authority's (FSA) Mortgage Market Review (MMR) regulations will come into effect, changing the way that house purchase loans are sold.

From that date, more responsibility will be placed on lenders to make sure that they are responsibly approving mortgage applications and not just giving them the green light without proper consideration.

But what does this mean for buyers and investors? And will the MMR be a good thing for the property market in the UK overall?

What is the MMR?

The MMR was an investigation into the mortgage lending sector in the UK, carried out by the FSA in 2009. It was a direct reaction to the way the property market fell spectacularly in the middle of 2008, and was designed to focus on ways to stop the sort of irresponsible lending that was given much of the blame for the problems the sector had faced previously.

Overall, the aim of the MMR was to create a stable lending environment that would make the property market far more sustainable in the long term and lower the risk of problems that had been seen previously arising again. 

The major problem that the MMR is looking to eradicate is that of people being afforded mortgages that they will have very little ability to be able to pay back.

Under the new rules, mortgage providers will be obliged to carry out what are known as stress tests. These are designed to work out whether or not they have the ability to repay their mortgage, and will have to take into account all expenditure from households, as opposed to just looking at incoming and major outgoing finances. 

So what does it mean for buyers, and why is the introduction of new MMR rules a good thing for the property market, and for investors in general?

Buyers face new rules

For buyers, the MMR's introduction in April will mean that they see a raft of changes to how the mortgage sector works. 

Going forward, providers will need to assess not only what people can afford now based on their wages and their employment status, but they will also need to take into account their general expenditure, inclusive of things like what they buy their pets, making it a far more inclusive process than before.

On top of this, longer and more in-depth interviews will mean mortgage providers will be able to assess what is the best product for buyers. Anyone looking to get a mortgage can expect to be taking part in at least one, and maybe more, very long meetings before they are approved, but the end result should be better, with more suitable products being sold.

Perhaps the biggest change, however, is that of future affordability. The big problem that was behind the fall in property prices in 2008 was that previous mortgages (in the 1990s in particular) had been sold under the belief that property would only ever appreciate in value.

We now know this is not the case, of course, and the MMR will mean that mortgage providers need to take this into account more often. 

From April 26th, not only will they need to ascertain whether a buyer can afford their repayments in the here and now, but also how they would be able to cope with changing circumstances, such as an alteration in interest rates. 

It adds a new level to the application process, and will mean that there are fewer issues in the future if there are major shifts in rates. 

More stability

The biggest positive that we stand to see in the property sector from the introduction of MMR is the fact that the market will be more than likely to stabilise, lowering the risk of another property bubble and a return to the falls of more than 30 per cent in property values that was experienced in 2008.

The Financial Conduct Authority's (FCA) main concern is that mortgage providers have previously been handing out house purchase loans without analysing if people can realistically afford to pay it back, with most having short term gains in mind. 

However, under the new regulations, the highest risk customers would be unlikely to be approved meaning that more reasoned and considered lending becomes the focus of the market. This means that there will be fewer defaults on mortgage payments, and a severe reduction in the number of repossessions, which can only be good for the financial state of the sector.

On top of this, there will also be a drop in demand, which can serve to be a good thing in the long run. London witnessed price rises of 13.2 per cent in the past year to the end of February, and many people have predicted that this could lead to an eventual property bubble. 

While the risk of this happening is actually very low, any moves to protect sustainability in the long run can only be a good thing. 

It's believed that the UK faces a future of housing shortages amounting to a million, and it is this supply and demand pressure that can theoretically see prices rise at unsustainable levels.

So it stands to reason that if fewer candidates who cannot realistically afford mortgages are having their applications approved, then price increases down the line should be far less drastic, giving the market a more solid and consistent level of growth moving forward.

Fewer buyers

Fewer buyers around in the market may sound like a negative rather than something to be looking forward to, but in big city areas it can act as something of an opportunity for those who are looking to invest.

According to Paul Winter, chief executive of Ipswich Building Society, the new regulations are likely to see a third of people who would be approved for a house purchase loan at the moment turned down because of the new rules on affordability. 

This would mean, he told the Telegraph, that between April and June alone, some 67,000 Brits who might have bought properties will be unable to do so.

It could be a reality, however, that will open the door for investors looking to get a piece of the rental sector at the current time.

For more than a year, demand for properties has been very high, and this has pushed prices ever higher. However, fewer buyers around would mean that there is a better chance that those looking to buy-to-let could get themselves a good deal.

And with rental demand also buoyed by the fact that there will be fewer buyers around - and subsequently more people looking to rent rather than buy - investors could be making far more than the average six per cent average yields that were experienced across the UK throughout 2013.

It doesn't necessarily mean that everything will be rosy though, of course. More people renting is a very positive position for investors to be in, but there are fears that those who are looking to buy and sell properties could face difficulty in offloading them with fewer buyers around in the future.

The MMR was introduced to bring about more certainty and stability to the sector, but at the moment, all that is certain is that only time will tell how much of an impact it has for the property market and its professional investors.