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Tuesday, July 23, 2013

The new tighter rules for UK mortgage lending explained

Standard credit checks are a requirement for home loan applicants
Credit score affects mortgage outcome
By Lauren Sutton

Before the property market crashed towards the end of 2007, house values were skyrocketing. People seemed to be living the high life, making a fortune on their properties and spending more money than ever before. Of course, when the dream did fall to pieces around them, people put their houses on the market and tightened the purse strings. The result was house prices in free-fall, banks refusing to lend and everyone stuck in limbo for an indefinite amount of time.

Now, as the market starts to recover, the banks are being careful not to make the same mistakes as before and have cracked down on their lending habits. It is important to understand that there are still lots of mortgage lending options available from telephone mortgages through to fee free remortgages and more.

What went wrong?

Before the crash, companies were lending to almost everyone. This appeared to be brilliant for the economy and it seemed like everything was ticking along perfectly. The problems came when lenders started giving money to people who had no way of paying it back. Once the backlog started, it was a slippery slope down with a lot of people left out of pocket.

Housing mortgage
Loan affordability factors into mortgage application review

Banks started to collapse under the pressure and some big names nearly disappeared altogether. It was only through government bailouts that some of them managed to survive. Once this happened, the struggle began to pay back all the debts that had mounted up over the years. Consequently, the lenders cracked down on who they lent money to, as well as the amount they were prepared to lend.

What's changed?

Whereas in the past pretty much anyone could get a mortgage, there are now rules in place that prevent this from happening. Mortgages were being offered to people who hadn't had any background checks carried out on them, meaning you could borrow hundreds of thousands of pounds even if you already had huge debts.

This won't happen anymore, with the new rules stipulating that a borrower would be refused a loan if they failed a standard credit check. In an agreement made with the EU member states, here will also be a standard information sheet that explains to borrowers how to find the right mortgage for them. Many of the changes in the EU agreement won't have a huge impact on the UK system, as some of the new rules are already effectively in place in Britain anyway.

What can I borrow?

The new rules won't necessarily restrict you from borrowing; it may just make the whole process more clear-cut. People who clearly cannot afford the repayments are more likely to be refused for a mortgage or offered a much lower one. With this system, the people with bad credit are likely to have difficulty in getting a mortgage, but this could impact positively on borrowers who are deemed to be safer bets.

The lenders may gradually build up their confidence when they know that they're dealing with borrowers who can definitely afford to pay back their loans, making them more willing to lend more. It could be a slow process, but with the housing market strengthening every month, it seems to be heading in the right direction. The more responsible attitude to lending and borrowing may help to avoid another occurrence of the 2007 market crash from happening in the future.

About the author: This article, produced on behalf of Cambridge Building Society, was written by the UK-based journalist and (recent) first-time home-owner Lauren Sutton. Connect with the Cambridge team @cambridgebs on Twitter and Lauren on Google+.

* Image licenses: 1. Albion80; RGBStock.com royalty free license 2. Author owned and licensed 

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