New mortgage rules require 'lifestyle quiz' for borrowers

FROM Saturday, people applying for a mortgage will face questions about their spending on anything from childcare to haircuts, under new rules designed to make sure borrowers can afford to repay their loans.

Mortgage brokers have expressed concern that the new system could lead to delays or too many rejections - but many lenders have already changed their procedures to comply and the Council of Mortgage Lenders said the transition would be "smooth".

So what does the new mortgage "lifestyle quiz" - as the BBC dubs it - mean for anyone trying to buy a house?

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What's new in the application process?Traditionally, to apply for a mortgage, you needed to provide recent bank statements to show your outgoings, and payslips from the past three months to prove your income. From Saturday, you will also need to answer a series of questions on your outgoings from your prospective lender, questions dubbed "invasive" by the Daily Mail.

What questions will be asked?Example questions provided by the Financial Conduct Authority (FCA), which ordered the reforms, cover childcare arrangements, weekly food bill, gym membership costs - or even the cost of haircuts and other beauty treatments. The interviews could last up to three hours, the Mail claims.

What about fixed-rate mortgages?These will be much harder to come by from Saturday, the Mail says, because lenders will now have to take into account the possibility of a steep rise in interest rates, and the effect that would have on a borrower's ability to repay his or her loan. Currently nine out of ten mortgages are fixed-rate, but this is likely to decrease sharply when lenders are obliged to 'stress-test' an applicant's ability to repay over the next five years under higher interest rates.

So will fewer people be able to get a mortgage?Yes - but opinion varies about just how many fewer applications will now be successful. Peter Hill, chief executive of the Leeds Building Society told the BBC he expects the changes to debar about 2.5 per cent of would-be borrowers in a normal mortgage market, rising to 11 per cent in a more buoyant market - which he said was "much smaller than some people fear".

Why have the changes been made?The global financial crash of 2007-2008 was sparked by bad debts in the US mortgage market; in other words, too many people had been given loans they could never have afforded to repay. And the situation is similar in the UK.

Martin Wheatley of the FCA told the BBC: "We've come out of a period, particularly in 2008-09, when there was no attempt to verify people's ability to pay, and we've ended up with lots of payment problems, lots of people in mortgages that are problematic for them." He said the "core principle" of the new rules is to "lend to people what they can afford to repay."