Nic Cicutti: Mortgage lending rules do not reflect reality


Advisers will often tell the key moments of contact between themselves and potential clients tend to be at the point of life-changing events – retirement planning perhaps, marriage, the birth of a child, or buying one’s first home.

For many financial writers these are events we most often experience vicariously, through the prism of our readers’ life stories. But there will be times when we too undergo the same procedures as those we write about and they help colour what we then feel about the overall process.

In my own case, that “life experience” has involved a remortgage with a proposed increase in the loan itself, from a loan-to-value of 7 per cent to one of about 10 per cent.

The purpose of the increased loan is to carry out much-needed landscaping of our garden, which was ruined after being used as a building site following after a fire at our property two and a half years ago. Also, we are hoping to rebuild a 30ft by 18ft outbuilding to comply with Building Regulations standards.

As many advisers who work in the mortgage market know, in April 2014 the FCA brought in new rules detailing what banks and building societies must do before they approve someone for a mortgage.

The move came in the wake of the financial crash of 2007-2008, when it became clear that credit of all descriptions had been offered far too easily to borrowers with no earthly hope of repaying what they owed. Following extensive consultations, this led to the stricter regime now in place for mortgage lending.

As someone who, in a previous existence, was able to borrow five times earnings, with our lender’s fact-checking at the time involving barely more than asking what my salary was and where I wanted the requested sum to be paid, I was in favour of the new rules.

In fact, when they were introduced I remember writing: “I’d rather people were forced to think carefully about what kind of home loan they can really afford, with a few thousand borrowers turned down every year because their disposable income does not remotely match their borrowing aspirations…”

By and large, I still hold those views. But our experiences in recent weeks has cast a light on the way the system works. To be honest, I’m not sure it works very well.

In our case, we opted to go to our existing lender to discuss an increased home loan. After two extremely wearying hours later we came off the phone with a promise that our nice mortgage adviser would contact us later that morning, once the underwriters had a chance to look at the application.

Several hours later, the setback: the most we would be allowed to borrow would be £20,000 more, which would barely cover one of the two areas of work we wanted to complete.

The key difficulty, it seems is the rule whereby we need to show that, aside from more stringent affordability requirements, we are able to repay the loan without selling the property.

This either means having assets to pay off the mortgage at the end of term or being able to do so while still working – a bit of a problem when you are already in your mid-to-late 50s. The possibility the tax-free element from our pensions at retirement might also go towards paying off the last part of our mortgage apparently does not count.

Neither did the option of selling up, paying off the remaining loan and downsizing with at least 85 to 90 per cent of our equity from the old property, probably a lot more.

We were given a week to decide whether to accept this offer. A week later, we spoke to our lovely adviser again. My wife and I had (sensibly) agreed that, if push came to shove, we would rather borrow less and complete the first phase of our plans. Which meant taking the 20 grand on offer from our bank and postponing the outbuilding work.

At which point, the adviser then said that having discussed the issue with the underwriters, we would be able to borrow an extra sum closer to the high 20s. She also asked pointedly about my retirement age, which I had already extended to 70 in order to qualify for the higher loan.

It became evident to me that were I to agree to a further extension to my working life, even more funds might be forthcoming, possibly as much as we needed to carry out the two projects at the same time, as first planned.

The result is the bank and I have agreed that in order to qualify for the significantly higher loan we have been offered, our mortgage repayment period now stretches to just shy of 15 years.

In theory, this means I am now committed to working until my early-to-mid 70s. Is that realistic? Just possibly: there is no limit on how long I can keep working in my various jobs, I suppose. And I am grateful we have managed to secure the extra funds we need.

But I cannot help feeling the new rules are being used in a tick-box way that does not reflect the reality of people’s lives any more than the old ones did. That cannot be good for borrowers, lenders or, ultimately, the financial system.

Nic Cicutti is a freelance journalist