New rules to prevent the kind of risky mortgage lending that was common during the housing boom could be in place by next year.
The Financial Services Authority (FSA) wants tighter controls so that people don’t borrow more than they can afford and are properly informed when they take out a mortgage. It says it wants “common sense” standards to apply in future.
An FSA statement said: “The Mortgage Market Review aims to prevent a recurrence of the irresponsible lending which resulted in some borrowers taking on mortgages which only seemed affordable on the assumption that house prices would always rise.
“Many of those borrowers ended up struggling to repay their mortgage and in danger of losing their home.”
The FSA proposals are based on what it calls three principles of good mortgage underwriting:
- 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.
- 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.
The FSA says most of the excesses of a few years ago have already been eradicated and controls are now much tighter. However, it wants to ensure that these rules are in place to prevent any problems arising when the economy starts to improve.
Other key features in the FSA’s Mortgage Market Review include:
- 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.
The FSA is now conducting a public consultation on the proposals and will decide on a final set of rules in the summer. However, it’s unlikely that the new rules will be implemented before next year.
We shall keep clients informed of developments.
Please contact us if you would like more information about the issues raised in this article or any aspect of buying and selling a property.