The Financial Services Authority (FSA) has outlined how it will attempt to more effectively regulate the UK mortgage market in the future and to stop borrowers taking out loans that they cannot afford.
The FSA gas spent three years working on how to manage the changes in the market brought about by the dramatic events of the credit crunch that saw elements of the market move from reckless lending to hardly any lending.
The FSA says its review will "hard-wire common sense into the mortgage market" and put common sense at the heart of the mortgage market.
Paul Smee, CML director general, said: "Today's rules bring certainty. Lenders can now make firm plans to ensure that they meet the new requirements when they formally come into place in April 2014.”
The report recommends dramatic changes that will affect all types of borrowers. It stops short of banning self-certification mortgages for the self-employed but does recommend that borrowers must prove their earnings independently. The FSA also did not recommend an age limit on lending as some analysts expected.
Paul Broadhead, Head of Mortgage Policy at the Building Societies Association said: "Contrary to some reports the over 50's won't be 'banned' from getting a mortgage under the new rules.”
Lenders will have to base lending levels on net income for all types of borrowers. All borrowers except those who earn more than £300,000 a year or work in the mortgage industry will be expected to get advice.
The onus will be on the self-employed to prove their income and lenders to check but the FSA was careful not to close the door on self-employed, first-time buyers and older borrowers as the property market needs all the help it can get to get back to historical levels of activity.
Interest-only mortgages will still be available but only if the borrower has a credible repayment plan. Relying on rising house prices will not be enough.
All mortgage lenders will have to take into account the effect of increases in interest rates and the impact they have on mortgage repayments.
Paul Broadhead said: "It is common sense that a mortgage should be repayable from income, rather than rely on increasing property prices and this is the approach that building societies and other mutual lenders already take.”
Some of the aims of the FSA’s review have already been implemented by most lenders as the market has corrected itself since the excesses of the past that caused the credit crunch. Indeed many potential homeowners would say that the mortgage market has over-compensated.
Nationwide and the Co-operative Building Societies have already banned interest-only mortgages for new borrowing.
Martin Wheatley, of the FSA said: "We recognise many lenders are now using a far more sensible set of lending criteria than before, but it is important these common sense principles are hard-wired into the system to protect borrowers.
"We want borrowers to feel confident that poor practices of the past, which led to hardship and anxiety, are not repeated. At the heart of the new measures is an affordability test to check borrowers can meet the repayments of the mortgage they want."
The FSA has moved to address the issue of “mortgage prisoners”, homeowners who are trapped on their lenders standard variable rate or on an interest-only mortgage and cannot move to a better deal. The FSA has advised lenders to use their discretion and make exceptions for customers who need to remortgage as long as there monthly repayment s don’t increase.
Which? chief executive Peter Vicary-Smith said: "It's disgraceful that banks encouraged so many people to borrow more than they could afford without proper checks. The banks have a responsibility to help these people who are now struggling through no fault of their own.”