Are cheap mortgage deals coming to an end?

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Talk of an imminent end to low two-year fixed-rate mortgage deals as a result of new lending rules being introduced this week are premature, say the experts.

From 26 April, mortgage lenders have to officially become much more careful about who they lend money to for the purpose of buying a house, following the introduction of new rules by the Financial Conduct Authority (FCA).

Speaking to a newspaper about the rule change, the boss of the FCA Authority, Martin Wheatley, suggested that the number of so-called 'teaser rates' available in the form of two-year fixed mortgages at juicy low rates could reduce.

He said: "We have some concerns about those short-term teaser rates that suck people into something. The question is: 'Can you afford whatever it resets to at the end of that rate?'"

As part of the rule change, known as the Mortgage Market Review (MMR), lenders have to stress test a borrower's mortgage application; meaning that as well as considering what mortgage rates are at presents, they must consider what rates are likely to be in the next few years – and, crucially, whether borrowers could afford any potential rise in rates.

While it is expected that rates will revert to around 6 or 7% over the next five years, compared to the average two-year fix today of 2.37%, many mortgage brokers don't think cheap two-year deals are on the way out any time soon.

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Temporary measure

David Hollingworth at brokerage London and Country told Moneywise: "Lenders are still offering short-term deals including those that are already MMR-compliant.
"In the near term, rates might edge up a little bit generally, as lenders bed their systems in, but that is more likely to be a temporary measure and not focused on any particular product type."

Mark Harris, chief executive of mortgage broker SPF Private Clients, added: "If borrowers are being stress tested to ensure they can afford repayments when rates are higher, why the need to stop cheap short-term fixed rates?

"We don't think this will happen: the next time banks need to lend to hit targets, they will release highly competitive rates, no doubt about that."

However, Wheatley also said that FCA research indicates other effects of the MMR could include a slowdown in house price growth, mortgages taking longer to complete, and a reduction in the availability of interest-only mortgages.

So what exactly are the new rules?

  • Lenders will have to gauge whether a borrower can afford mortgage payments from the outset of the loan and further down the line.
  • To do this they will have to build a detailed picture of a customer's finances, which can include how much they spend on clothes and eating out, as well as their usual household bills, in relation to how much they earn.
  • While good mortgage brokers have been doing this for some time in order to be ready for the rule change, lenders who deal directly with customers are about to do this for the first time.
  • Some banks have said that staff will now have to conduct 'mortgage interviews' with potential borrowers that last hours.

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