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Stringent Loan Tests Ahead

Written By On 23/04/2014

The Financial Conduct Authority are requiring banks and building societies to obtain more detailed information from their mortgage and loan applicants before satisfying their needs.

The extra stringent criteria will start within a few days time and will mean that many first time buyers and more experienced ones alike may undergo interviews that can feel more like an interrogation.

If loan applicants have a perfect credit history and never missed any mortgage instalments in the past, the new examinations will still have to be passed if you are looking to move.

This will also apply to anyone with an existing mortgage looking to switch to a cheaper one even if they have had no problems meeting their current repayments.

Until recently most financial institutions would have approved a mortgage after checking a potential customer’s credit history and affordability in proportion to their income. But from now on it will go much deeper than that.

It will not now be enough to show that they can afford their new proposed monthly repayments, but will also need to prove they are able to pay higher premiums should interest rates increase in the future.

The FCA believe that this is in the public’s interest to defend them from only looking short term and prevent them from entering into a future situation that may lead to a stressful predicament.

They are concerned that a two-year fixed rate offer for example may sound very affordable when first taken out, but rates may have increased a few times within the deal. Therefore a person may be totally out of their comfort zone when new rates are ready to be negotiated.

Norwich & Peterborough Building Society, are currently running the most competitive two-year fixed rate deal at 2.04 per cent.

The new City watchdog’s chief executive Martin Wheatley explains:

What the affordability test is doing is forcing lenders to look through whatever the short term deal is. The question we have to ask is - can you afford whatever it resets to at the end of that rate?