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Nic Cicutti: Lenders are right to get tough on would-be borrowers

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About six or seven years ago I received a call from a London-based TV production company about a new series they were hoping to make.

Each weekly episode would focus on someone with a different money challenge, with me cast in the role
of the “financial godfather”. The hour-long episode would film us both as we hopefully came closer to realising the person’s goal in the following weeks.

The opportunity of television stardom does not come that often – which was why a couple of days
later I caught a cab out to a cavernous studio in West London for a screen test.

When I got there I discovered that what the producers had in mind was for me to interview a young woman in her early 20s – let’s call her Jane – who wanted to buy a house with her boyfriend. My initial task was to quiz Jane and then suggest ways of achieving that goal.

The problem was that as our chat went on, it became clear there was no way on earth any sane lender should have provided Jane and her partner with a penny.

I no longer remember what the couple’s joint income was but I do recall they were looking for a 100 per cent mortgage almost five times their combined salary. They did not even have the money to pay legal or mortgage application fees or for a survey of any property they might have wanted to buy.

Not only that, but Jane also owed thousands of pounds on several credit cards thanks to a compulsion to spend a small monthly fortune on toiletries, clothes, shoes, going out and foreign holidays.

Meanwhile, her boyfriend was paying a couple of hundred quid a month for a fancy car, which consumed something like 20 per cent of his net income, taking a loan, insurance and road tax into account – and his own spendthrift lifestyle was similar to his girlfriend’s.

My verdict, which went down like a lead balloon, was that if Jane thought I would advise her how to buy a house in these circumstances, she must take me for an idiot.

Before Jane even considered a home purchase, she should pay off her credit card debts, stop her bonkers spending sprees and set aside a few grand for the various bills she and her boyfriend would face if they ever did make an offer on a property. He, meanwhile, should dump his expensive motor and stick to a bicycle.

As I imparted these opinions to a by now sullen Jane, I could hear gasps behind the camera, which I took to be signs of admiration and approval for my sagacious comments.

They were anything but: what I had actually done was to not only crush Jane’s home-buying aspirations. I had also put a spoke in the wheel of the producers, who had wanted her to be the first subject of the proposed series.

So it was that an hour later I found myself in a cab heading back to Hammersmith tube station, my aspiring broadcast career in tatters.

Fast-forward eight years to new rules introduced last week by the FCA forcing anyone who applies for a mortgage not just to give details of their income but to answer questions about their spending – from the cost of regular haircuts to gambling and club subscriptions and deliveries, holidays, travel season tickets and childcare.

According to the BBC, borrowers will also be expected to say if their financial position is expected to change, including predicted changes in income or working hours as well as any plans to have children in the near future.

Some newspapers have described this as a terrible intrusion into would-be borrowers’ private lives, with commentators suggesting the FCA’s Mortgage Market Review will single-handedly bring the current property boom to a halt, undoing months of “positive” work by the Government’s Help to Buy scheme.

Who knows, it may well do. But you know what? I’d rather people were forced to think carefully about what kind of home loan they can really afford, with a few thousand borrowers turned down every year because their disposable income does not remotely match their borrowing aspirations, than see a repeat of the early-to-mid-1990s.

Back then, I remember good friends of mine being forced to return their house keys because they could not afford their mortgages when interest rates shot up. Years later, just when they thought everything had been forgotten, they found themselves hounded to repay their lenders’ losses.

This time round, the only reason we avoided a financial meltdown was because interest rates remained stubbornly low for years – and because lenders tried desperately hard to avoid the repossession mistakes of 20 years ago. 

Next time, however, there is no guarantee of such a relatively benign scenario.

As for Jane, I have no idea whether she took my homily against excessive borrowing on board. 

In fact, I don’t even know whether the TV series got made. Probably the concept was overtaken by the financial crisis that engulfed the industrialised world within months of my failed screen test.

But I’d like to think my words had some effect on Jane. If they did, it was almost worth giving up a television career for. 

Hopefully, the MMR will have a similar impact on thousands of other borrowers.

Nic Cicutti Can be contacted at nic@inspiredmoney.co.uk

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Comments

There are 7 comments at the moment, we would love to hear your opinion too.

  1. The MMR is ten years too late.

    Lenders have been reining in on their previous profligacy since 2007 and ‘Jane’ would have had zero chance of success regardless of the MMR.

    We all want sensible lending but we all want common-sense to be introduced. This si the real challenge and thus far the MMR has taken more common-sense out than it has introduced.

    Who else thinks that the answer to society’s ills is yet more regulation?

  2. Sascha Klauß 1st May 2014 at 9:59 am

    “me cast in the role of the “financial godfather”

    How very racist. Did you have to wear a black suit and slur things like “I’m going to make you a financial plan you can’t refuse?”

  3. @Sascha: er, not clear what you mean. But if you are quoting Don Corleone, the best speech he makes is to the undertaker at his daughter Connie’s wedding.

  4. Edward Gibson 1st May 2014 at 1:49 pm

    Alan, I’m not sure that I would agree that lenders have really reined in their profligacy. If by that you mean the death of the self cert “what do I need to put” mortgage, then yes. If you mean reconsidered their relationship with economic realities and looked past the drive for turnover, then to express a forced reining in as a positive decision is an error. An error which, without the MMR, would have led inexorably to the next crisis. They can’t wait to get back to an environment where they can lend profligately on the back of a booming market which provides their security.

    The noise to date has been on the evil of a lender wanting to know how much you spend on getting your haircut. The point however is that every week financial planners talk to people who on a straight income v fixed outgoings have surplus income and in reality are actually funding aspects of their lifestyle instead from debt. If you are going to, sensibly, stress test a rise in interest rates then this has to be against the background of total actual expenditure and in a way where it becomes clear to a borrower what that increase will mean in lifestyle terms – interest rate up 1%, what exactly of all this are you going to give up? Surely that is common sense?

  5. Steven Pearman 1st May 2014 at 1:58 pm

    Wow, you are dredging the barrel to fill column inches today.

    Breaking news, Nick told someone who would never have been able to get a mortgage in any market that they could not and this makes the Mortgage Market Review a good idea.

    Most people want SENSIBLE rules that result in SENSIBLE outcomes. Not rules that create millions of mortgage prisoners who are now at the mercy of their current mortgage lenders variable rate with no hope of moving. Or do you sit in the camp that thinks its a good idea to overcharge people for something they already have, hence depriving their children etc?

  6. Ignoring whether or not the MMR is a sensible step forward (which as an ex-building society manager of 20 years agi, I think it probably is – if perhaps a little too detailed and open to fibbing), What I find something of a conundrum though is the powers that be’s approach to mortgage borrowers on the one hand, and new retirees on the other.

    Mortgage borrowers are to be subjected to a very controlled “we know best” approach (and in many ways “we” may well know best given the irresponsibility of some folk!)

    On the other hand, retirees are to be “treated like responsible adults” and free to splurge their entire futiue pot with little restraint – the exact opposite. Perhaps age could be argued to make one more responsible, but I have my doubts – I have a lingering haunting feeling of “pensions unlocking mark two” lurking somewhere over the horizen……

  7. Andrew Allcock 1st May 2014 at 3:05 pm

    Spot on Steven Pearman,

    The impact of MMR on those who would never had obtained a mortgage, i.e. Nicks story, is irrelevant, it is the impact of MMR on those who have perfect payment records for twenty years plus who are now excluded from the mortgage market and will remain prisoners to their existing lender on the basis they cannot afford to pay less than they are paying now!!

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