FSA sets out new mortgage rules to curb irresponsible lending
Monday, 19 December 2011 08:51
The Financial Services Authority (FSA) has proposed new rules on mortgage lending to try and limit risky loans and avoid the problems that helped cause the financial crash in 2008.
The new rules are designed to limit lending to individuals to levels that they prove they can afford as the FSA tells lenders that they need to improve their methods of assessing the suitability of home owners for loans.
Interest-only loans will not be banned outright but borrowers will have to prove that they have a credible way of repaying the capital on their home.
The FSA says that three key fundamental principles have driven the new recommendations:-
• Mortgages and loans should only be advanced where there is a reasonable expectation that the customer can repay without relying on uncertain future house price rises. Lenders should assess affordability;
• This affordability assessment should allow for the possibility that interest rates might rise in future: borrowers should not enter contracts which are only affordable on the assumption that low initial interest rates will last forever; and
• Interest-only mortgages should be assessed on a repayment basis unless there is a believable strategy for repaying out of capital resources that does not rely on the assumption that house prices will rise.
Lord Turner, chairman of the FSA, said:"We believe that these are common sense proposals which serve the interests of both lenders and borrowers. While the excesses of the pre-crisis period have largely disappeared from the current market, it is important to ensure that better practice endures in future when memories of the crisis recede and the dangers of poor practice return.”
The main proposals outlined are:-
• Income will have to be verified in every mortgage application;
• Lenders do not have to consider in detail what borrowers spend but cannot ignore unavoidable bills, such as heating and council tax;
• Interest-only mortgages can still be offered as long as borrowers have a credible plan to repay the capital. But relying on hopes of rising property values is not enough;
• Lenders will have to consider the impact of increases in interest rates in line with current market expectations;
• Some applicants, such as those trying to consolidate debts with a mortgage, will have to get advice to ensure they understand the full implications and costs; and
• 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.
It is expected that there will be some flexibility for existing customers who got on the property ladder before the financial crisis in 2008 when lending criteria was not as strict so that they can re-mortgage.
During 2007, 33 per cent of all mortgages were issued on an interest-only basis. Earlier drafts of the FSA’s review would have prevented many homeowners from keeping their loans if they moved home or remortgaged.
However, following lobbying from both lenders and brokers it seems the FSA has relented and that existing borrowers who took out loans under the old rules that would not be approved under the new proposals will now be able to keep their interest-only loans.
The FSA’s review aims to stop the type of loans made to homeowners with no real check on their ability to repay, such as “self-certified” mortgages. The most notorious examples came from Northern Rock, who marketed their “Together” mortgage towards people who could not put down any deposit and offered loans worth 125 per cent of the value of the property.
The mortgage industry has broadly welcomed the proposals. CML director general Paul Smee commented:"Lending needs to be responsible and done in a way which protects consumers. Rules need to be practical and avoid unintended consequences. Whilst there is much detail to be pored over, the FSA's new proposals seem to strike broadly the right balance.”
The FSA’s proposals will now go out for further public consultation but the aim is to provide specific types of buyers, whether they are first-time buyers, people remortgaging or right-to-buy tenants, with the right information and for lenders to improve their assessment criteria for lending.
Paul Broadhead, Head of Mortgage Policy at the BSA, said:"The devil is always in the detail but these proposals seem to represent a welcome shift in policy by the FSA. No-one is looking for a regime that permits lax lending practices, however 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.
"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.”
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