Tim Wheeldon is managing director of Fluent Money
The recent implementation of the Mortgage Market Review means that lenders are now required to get up close and personal with customer spending habits.
Where previously potential borrowers might have expected to have their big-ticket buys and outstanding debts reviewed, they must now also be evaluated based on their smaller purchases.
Consumers have met the prospect of having ‘add-on’ purchases held under the microscope with understandable concern. However, the new requirement to cut back on ‘little extras’ may not be as austere as it seems at first glance.
The decision to review smaller purchases as well as larger ones suggests that impulse buys or ‘treats’ have a greater impact than we would like to think. This is evident in the fact that little luxuries such as games, apps, and online packages have not simply weathered the recession, but rather thrived for its duration. What this rise of small, instant purchases now measures is a changing pattern of what we spend our money on, and how we spend it.
The last few years witnessed an economic downturn, but at the same time saw dramatic advancements in everyday technology, with the rise of apps, online banking, contactless cards, online superstores such as iTunes and Amazon and popular streaming services such as Netflix and Spotify. Not only do the purchases in this list fall under the ‘little extras’ category, but the method with which we pay for them often means that money is spent quickly and thoughtlessly.
It is for this reason that, although the new Mortgage Review measures could be perceived as harsh, the necessity of reviewing smaller purchases highlights a broader cultural change that we often overlook. Spending online means that many fall into the trap of spending ‘invisible’ money, and spending it quickly.
When we observe the transformation of customer spending habits through this lens then the emphasis on cutting out smaller luxuries makes more sense. In particular, we must note that the new changes are intended to prevent a return the unsustainable borrowing that led to the last financial crash and the emergence of exploitative payday lenders.
Accumulating debt online is easier than it has ever been, meaning cash can now fly out of consumers’ pockets before they even know it’s in there. It is through small, fast transactions on low-cost items that those in debt have been able to treat themselves throughout the recession, but it has also made millionaires of those providing these services.
The introduction of lifestyle questions to the MMR does not need to be treated as a miserable denial of little pleasures, but a call to would-be borrowers that spending needs to be prioritised, with close attention paid to the frequency of small payments.
Those that keep both big and small spending at the forefront of their minds when looking for a mortgage or a loan will reap the benefits of sensible purchases, with the potential to borrow up to five times their salary. This could make valuable steps towards eliminating payday lending and encourage responsible saving for those rebuilding their finances after a tough few years.
For those that might not be attuned to the full extent of their spending, the new review is a good opportunity to assess what they’re buying, and how they are buying it. The ‘little extras’ are stacking up, and if money is treated as invisible it can incur some big costs.