x Abu Dhabi, UAEFriday 21 July 2017

Future 'McMansion' owners must account for every Happy Meal

The difference between getting a mortgage or not could come down to the price of a dinner.

The difference between getting a mortgage or not could come down to the price of a dinner.

Britain is about to change the way it evaluates home-loan applications, with other countries sure to follow. And the man to blame is a surprisingly jolly banker named Tito Mboweni.

Mr Mboweni once ran the South African Reserve Bank. At the height of South Africa's property and credit boom in 2007, Mr Mboweni helped push through a law that effectively created a mini credit crunch in his country a full year before it arrived anywhere else.

As a result the local property market imploded and several large retailers almost went bankrupt.

And quite possibly, he also saved many of his countrymen the pain now being felt in Britain, the US and elsewhere.

Following the credit disasters around the world, Mr Mboweni's laws have been scrutinised from Whitehall to Dubai. Britain's new mortgage guidelines appear to be based on the South African model and should be implemented later this year.

This is how it works.

Previously, a potential homeowner had to show his bank manager that his salary could cover his mortgage payments. The rule of thumb is that a housing loan should not exceed around 30 per cent of your monthly pay check.

This meant that all you needed to secure your "McMansion" was proof of income. Banks were therefore operating under the delusion that most of us use our salaries to pay our mortgage, and survive the rest of the month on day-old bread and home-grown vegetables.

Since modern man cannot live without iPods, flatscreen TVs and other cool stuff, the extra money had to come from somewhere. So we ran up credit, again, and often with the same banks that issued the mortgage in the first place.

The really crafty among us would have several bank accounts and borrow from them all, ballooning the amount of cash that someone, somewhere, was going to ask us to return some day.

None of this affected mortgage applications, however, until Mr Mboweni, sometime in 2005, began fretting that too many people in his small corner of the world were living way, way beyond their means.

South Africans, he saw, were spending like a US sailor on shore leave from one of those large boats that tie up periodically in Dubai.

A couple of years later, South Africa issued a new credit act that required banks to carry out due-diligence on loan applicants of the sort that is usually performed on corporations prior to a merger.

Every last cent a potential borrower spends must be weighed and measured before a mortgage can be granted. In effect, a loan applicant is no longer valued based on income, but on cash flow. Now there's a concept to get accountants excited everywhere. Applicants must provide three to six months of bank statements, which are then thoroughly scrutinised.

Household expenses such as car payments, satellite subscriptions, medical bills, insurance, groceries - and yes, even dinners out, are tallied up.

Whatever free cash is left over after these expenses is then placed in the "income" column. On this basis, a mortgage is issued or declined.

Prior to Mr Mboweni's tinkering, a wage slave earning Dh20,000 a month would have been deemed eligible to support mortgage payments of around Dh6,000 a month.

Now, once his outgoing expenses are subtracted from this - bear in mind this includes credit-card payments, too - he could be left with free income of less than half this, optimistically speaking.

It does not take a large amount of financial acumen to figure out that Dh3,000 mortgage payments are not going to buy a whole lot, if anything at all. To ensure that banks don't feel tempted to return to the nudge-nudge, wink-wink lending practices of the past, the law has a sting to it.

If a borrower goes bust and the bank moves to foreclose, it must prove that it carried out the above-mentioned due diligence. If it didn't, and the lender can show the bank lent him more than he could pay back, then he walks away free. The bank cannot reclaim lost money from the defaulting borrower.

Having to explain yourself to such a degree is going to have profound affect on your ability to borrow. The UK's Council of Mortgage Lenders estimates that around 20 per cent of applicants will be unable to acquire a bond under the criteria.