The FSA (Financial Services Authority) have proposed tighter lending guidelines in an effort to avoid borrowers taking on mortgages which they cannot afford.
The FSA set out the new proposals in their ‘Mortgage Market Review’ saying they were “common sense”. The proposals are mainly aimed at stopping ‘self cert’ mortgages, where applicants do not need to prove their income, and a move away from interest only mortgages where no specific repayment vehicle in place.
The FSA has told lenders that they must also get better at assessing the affordability of loans, although greater flexibility will be allowed for existing customers looking for a remortgage.
Bad mortgage practices
Although the excesses of the years post the millennium have mostly disappeared, for example it is no longer possible to get a ‘self cert’ mortgage, the FSA wants guard against some of the bad practices seen during these years when lenders regularly offered mortgages with large income multiples, often in excess of five times a borrowers income, and in some circumstances lent in excess of the value of a property.
The FSA’s proposals include:
Lenders must make more of an effort to properly judge the ability of an applicant to repay a loan
- Lenders will have to assume that interest rates will rise from the current low levels and factor this in to any affordability calculations
- Mortgage borrowers will not be allowed interest only mortgages where they are relying on future rises in the value of their property to repay the loan
- Making lenders assess interest only applications as if they were capital repayment, unless a “credible” repayment vehicle is in place
Existing mortgage borrowers
Existing borrowers, who may have a loan which would not be approved under the new regime, will not be adversely affected by the new proposals or prevented from remortgaging.
The FSA said: “Existing borrowers will be unaffected and lenders will have the flexibility to provide new mortgages to some existing customers even where they do not meet the new affordability requirements.”
“We will allow lenders to waive the affordability rules when entering a new mortgage contract – providing the borrower has a good repayment history.”
However, it was unclear whether borrowers with ‘non standard’ profiles would be able to remortgage to an alternative lender or be limited to a new mortgage product from their current lender.
The proposals were greeted by a mixed reaction.
Paul Broadhead of the Building Societies Association said: “The original proposals were in danger of locking credit-worthy borrowers out of the market or imprisoning those with immaculate payment records, but non-standard profiles, in their current homes and loans.”
He continued: “This seems to have been avoided which is good news for the self-employed, those in existing self-certified mortgages and people with negative equity.”
Paul Smee, director general of the Council of Mortgage Lenders said the new version of the FSA’s rules was “workable and appropriate”.
He continued: “The FSA’s new proposals seem to strike broadly the right balance.”