In the past, the mortgage market has generally been well functioning with minimal disruption. However, in the mortgage market boom from 2005-2007, the market encountered a few issues. The main problem with the market during the boom was a concern with high risk borrowing and lending. High risk borrowing and lending refers to lending money to a customer who has a low credit score or a customer who has a higher chance of defaulting on the loan because of other commitments. This resulted in a few customers being unable to pay their mortgage and caused instability in the market. Because of this problem, the government created the Mortgage Market Review in order to prevent the previous problems from occurring again.
Enacted on April 26th, 2014, the Mortgage Market Review affects both customers and lenders in a few different ways. The main goal of the review is to provide a strong market to customers and lenders as well provide a more sustainable market in the long run.
One change, affecting customers directly, is that each customer wishing to take out a mortgage must follow the new, stricter requirements to prove to lenders that they have sufficient income to pay back the loan after considering their other expenditures. Lenders are also now responsible for ensuring that the customer is able to afford the loan after all other commitments and they must also ensure that the income reported by the customer is correct. This change should help make the market more stable by ensuring that all customers are capable of paying their mortgage even if the interest rate increases.
The majority of customers are now able to borrow interest-only mortgages only if there is a clear and reliable repayment strategy. With this change, the market should become more stable because of the increased credibility of repayments. However, customers with high income or equity can still borrow on an interest only basis.
Another change that customers should be aware of is that now most interactive sales must be advised. An interactive sale is any sale that occurs face-to-face or over the telephone. This adjustment should increase stability in the market because now consumers are required to seek advice which should decrease the amount of unaffordable, risky mortgages sold in the market. With the new rules, non-advised sales are generally no longer allowed unless the customer happens to be a mortgage professional, a high net worth mortgage customer, or a business borrower.
With these new rules having just started, it is too soon to tell if they have any positive affect on the market. Only time will tell if the market will run into similar issues as seen in 2005-2007. However, since each rule was created with the goal of creating a strong mortgage market for both the consumer and the lender, it is likely to have a long-lasting, positive effect on the market.