Mortgage market update: the Leeds Reforms

You may have heard snippets of news regarding the recent ‘Leeds Reforms’ but this positive set of changes to the mortgage market have not been widely reported. The reforms, announced in Leeds this July by the Chancellor, are UK wide, meaning it should be easier and simpler for many property buyers to borrow money.

To put you in the full financial picture, we have answered the most common mortgage questions regarding this latest announcement.

Q. Can I borrow more money?

A. It is now more feasible to borrow in excess of 4.5 times your annual income. There was an industry-wide rule that stated no more than 15% of a bank or building society’s annual mortgage business could consist of high loan-to-income mortgages. 

When their 15% limit was reached, a lender had to stop high loan-to-income mortgages, whether the applicants could afford them or not. In July, however, the Bank of England relaxed the 15% cap. Now, individual lenders can breach the 15% limit, as long as the industry-wide level remains at 15%.

The revision is great news for borrowers who may not have the ideal salary or deposit required to purchase their desired home, but who are prudent with their money and/or may have savings to offset the mortgage debt they are taking on. 

Q. Can I buy with a low deposit?

A. The Government had good news for purchasers who are finding it hard to save a substantial deposit. In July, the Chancellor announced Freedom to Buy – a permanent mortgage scheme specifically aimed at those with deposits worth 5-9% of a property’s asking price. When a borrower has a low deposit, the loan-to-value ratio is classed as high.

The scheme involves the Government  insuring lenders against some financial losses associated with high loan-to-value ratios as the buyer is much closer to possible negative equity (when the mortgage debt is worth more than the property). 

As a result, lenders have more incentive to offer mortgages where the buyer requires a deposit as low as 5%. Plus, Freedom to Buy should encourage lenders to offer 5% deposit mortgages on a more consistent basis, even if the base rate changes. 

Q. Will lenders consider how promptly I’ve paid my rent?

A. It’s the Financial Conduct Authority’s (FCA) lending rules that currently prohibit a borrower’s rent payment history to be taken into account when applying for a mortgage. The rules, however, are probably going to change.

The Government has asked for a review of the FCA’s lending guidance to improve mortgage access for borrowers – especially first-time buyers. There is a strong suggestion that the Government wants renters who can demonstrate they have paid their rent in full and on time during a tenancy to be looked upon favourably by lenders.

This is heartening news for the thousands of tenants who reliably pay their rent without issue, as it clearly shows they can afford repayments, despite not having a mortgage history.

If you would like to know more about the Leeds Reforms and how they may improve your mortgage borrowing capacity, please get in touch.