On Thursday, the Financial Services Authority (FSA) published new mortgage regulations, proposed for 2014, designed in an attempt to reduce the level of ‘irresponsible lending’. The rules are aimed at ensuring that potential future borrowers don’t end up with a mortgage that they cannot afford to repay.
Subsequent to a Mortgage Market Review (MMR) conducted by the FSA, Martin Wheatley (MD of the FSA) stated that these regulations would establish a more viable market that aids both lenders and borrowers, and that unviable lending practises of the past would be eliminated, which generate nervousness and difficulties among borrowers.
Under the tighter regulations, lenders will have to carry out a more in-depth assessment of a borrower’s ability to repay before a mortgage is approved.
Since the credit crunch many lenders have already enforced stricter lending criteria for borrowers.
“We recognise that many lenders are now using a far more suitable set of lending criteria than before, but it is important that these common sense principles are hard-wired into the system to protect borrowers. We want borrowers to feel confident that poor practises of the past, which led to hardship and anxiety, are not repeated in the future” said Wheatley.
Self-certified mortgages, which allowed prospective borrowers to over-state their level of income, will be banned, as they led to loans being made which totalled many multiples of the applicants true annual income.
Interest-only deals, over which there was debate, will still be permitted – but only if the potential borrower can demonstrate a credible repayment strategy which does not rely on the rising of house prices. The repayment strategy will also be reviewed by the lender during the loan period.
Older buyers will be able to take out a mortgage regardless of their age so long as they can pay off the debt, even if this is during retirement.
Paul Smee, Director General of the Council of Mortgage Lenders (CML) said: “In practical terms, the regulatory changes have already been widely anticipated and so are unlikely to create any significant additional or unexpected impacts”.
However, property data network Xit2 has estimated that more than one million borrowers with interest-only mortgages due for repayment in the next eight years do not have a savings plan in place to repay the capital.
This could leave their homes at risk of repossession at the end of the mortgage term.
Paul Broadhead, Head of Mortgage Policy at the Building Societies Association (BSA) said: “No-one can argue with the objective that lenders lend only what consumers can afford to repay. It is common sense that a mortgage should be repayable from one’s income, rather than relying on increasing property prices, and this is an approach that many building societies and other mutual lenders already take”.
These new regulations will come into effect on the 26 April 2014.
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