The Mortgage Market Review took effect at the end of April, so May’s mortgage figures gave us the first clear look at how these new rules would have an impact. As the results show, the impact was quite distinct. The total number of mortgage approvals given in May 2014 was 61,707. This was a drop of 1,099 on the previous month. It was also the lowest rate of approvals seen since June 2013, the lowest number of approvals noted in 11 months.
Slower approvals are partly to blame
One of the reasons commonly given for this drop is the much slower procedure people now have to go through in order to be considered for a mortgage. Instead of the relatively fast approvals process that was previously in place, the variety of new rules have meant people have been subjected to in-depth questioning and assessments in order to determine their eligibility.
Furthermore the stricter conditions have also led to closer scrutiny with regard to the size of the mortgage that can be granted. Mortgage applicants are expected to be able to prove they could still afford the repayments if the interest rate were to increase in the future. This ensures borrowers cannot get mortgages they can just about afford now but be unable to afford in the years to come.
The housing market is cooling – but will it stay that way?
These changes have led to a cooling-off period in the housing market. There is still a shortage of properties available and this has encouraged prices to rise further. However if mortgages become even harder to obtain this could potentially lead to a price drop in the near future. We shall have to wait and see whether this could be the case. It may not pan out this way if one economist’s comments come true though. Rob Wood from the Berenberg bank estimated house prices would increase by around 10% between now and 2015.
Keeping a close eye on the loan to value ratio
This is perhaps the area that will be most closely monitored by those in charge. This determines what percentage of the property value can be given as a mortgage. For example if an individual buys a £250,000 property with a £50,000 deposit, they will have an 80% loan to value ratio, since they will be borrowing 80% of the total value of the property.
The median amount for this ratio currently stands at 83% where first-time buyers are concerned. However this drops for properties in London, where the median first-time buyer is borrowing 75% of the property value.
Clearly there is the potential for mortgage approvals to drop further in the immediate future. It is uncertain whether this is partly due to delays in processing applications according to the new rules or whether the rules themselves are limiting the approvals. Only time will reveal the long-term answers to that particular question, and it is something we shall be keeping an eye on.