NEW rules for lenders coming into effect today mean prospective mortgage borrowers will have their finances scrutinised as never before.
From now on, lenders and advisers will be obliged by the Financial Conduct Authority to undertake much more stringent affordability checks, including going through applicants' bank statements in forensic detail, to ensure they really can afford to borrow - and will continue to do so if mortgage rates rise.
That means anyone thinking of applying for a first home loan, moving to a new lender, increasing or making other significant changes to an existing loan would be well advised to review their spending now.
Loading article content
FCA chief executive Martin Wheatley said: "In the past, too many people got a mortgage by simply telling their lender they would have no problem repaying their debt, and that was that.
"Getting a mortgage can be one of the biggest financial decisions people will ever make, so it needs careful consideration. Our new rules will hard-wire common sense into mortgage lending."
Banks and building societies must now take into account everything from regular payments for gym membership and entertainment services such as Netflix, to pet insurance premiums and childcare costs, when deciding whether to lend.
Someone whose paperwork demonstrates their finances are in good shape should have no trouble borrowing, although the detailed questioning may mean the process takes slightly longer than before.
However, those with personal debt, a high level of outgoings, or erratic spending habits, could find it harder than ever to get a home loan.
Matt Sanders, mortgage spokesman for comparison website Gocompare.com, said: "Customers will have to prove their income as well as give evidence of their day-to-day expenditure, which will give lenders a more detailed picture of their finances and what they can actually afford." He said the new rules should also help avoid the financial stretch that many faced when they simply borrowed too much, or under-estimated their financial commitments".
Anyone applying for an interest-only mortgage or whose loan term will extend beyond retirement will have to prove they have a plan in place to meet the full cost.
However, borrowers applying to move an existing loan to a new property without additional borrowing should not face the enhanced checks.
But Philip Dodd, of website Money-Guidance.co.uk, fears lenders may use the rules as an excuse to turn down existing fixed-rate borrowers who apply to port, and insist they take out a new loan.
He said: "This represents unfair action by which lenders are either trapping their borrowers, or seeking to impose millions of pounds in early repayment charges over the next few years."
The new rules come into force when the mortgage market is looking increasingly healthy. According to the Council of Mortgage Lenders, gross UK lending for the first three months of the year was an estimated £46.3 billion, up 37% on the first quarter of 2013.
Meanwhile, Scottish house prices have risen by an average of 3.6% over the past year, taking the cost of the average home to just over £160,000.
Gordon Fowlis, managing director Scotland at estate agency Your Move, said: "Over the past year we've witnessed average prices climb by over £5,500, with Inverclyde seeing the greatest annual growth of all, at 16% - with the region clearly benefitting from its close proximity to Glasgow.
"In a sign of the widespread revival, all seven Scottish cities have also seen price rises from last year. This urban renaissance is being driven by first-time buyers benefitting from Help to Buy, typically taking the plunge in vibrant cities."
As prices rise and people find it harder to save, Scottish Widows says it now takes those living in rented accommodation an average of 15 years to amass a deposit.
If you want to climb on the property ladder - or move up it - before prices rise much further, the advice is to get organised now.
Lenders will be looking for detailed evidence not just of income, from payslips or accounts and tax returns, but scouring bank statements to get a picture of all your outgoings.
They will want to see that you can afford your mortgage repayments now - and if rates go up - after you have paid all household bills, made any debt repayments and spent on other things like clothes, entertainment and childcare.
So, to create a good impression, clear as much borrowing as possible, cut back on non-essential spending - and put every spare penny into savings.
Current mortgage best buys include a fee-free two-year fix from Clydesdale Bank at 3.89% (reverting to a long-term rate of 4.95%) available up to 90% of property value, and a five-year fix from the Post Office at 3.65% (reverting to 4.49%) with a £995 arrangement fee that is available up to 85% of value.
Meanwhile, HSBC is offering a two-year discount deal at a current rate of 1.49% (reverting to 3.94%) with a £999 fee for those borrowing only up to 60%.
HSBC also has long-term variable rate deals at 1.99% and 2.59%, both with a £499 fee, for customers borrowing up to 70% and 80% of property value respectively.
However, these deals will be available only to those who can prove their finances are in good order.