New mortgage lending rules set out by FSA

New rules to stop a resurgence in risky mortgage lending are likely to be imposed in 2013 by the Financial Services Authority (FSA).

The regulator's revised proposals still intend to bring in "common sense" standards that will stop home buyers borrowing more than they can afford.

Lenders are being told they must assess the affordability of loans better.

But some flexibility is being allowed for existing customers who might have been prevented from remortgaging.

Lord Turner, chairman of the FSA, said: "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 regulator wants to stop any possibility of a return to the early years of the past decade, in which some lenders handed out mortgages with only cursory checks on borrowers' real ability to repay.

The most notorious examples were the "Together" mortgages offered by the Northern Rock bank, which granted loans worth 125% of the value of homes.

In some other extreme cases, lenders offered mortgages worth seven times a borrower's income, or allowed them to exaggerate their real income, especially in the case of "self-certified" mortgages.

Latest proposals 

The thrust of the FSA's proposals, which are now going out to a further round of public consultation, is still that lenders must judge properly the ability of individual borrowers to repay.

"The proposals will see prospective borrowers - whether they are first-time buyers, right-to-buy tenants or home movers - get the right information and advice, at the right time, and ensure mortgage lenders will be properly checking each applicant's realistic ability to repay their mortgage," the FSA said.

Specifically, when lenders assess a mortgage application, they will have to:

• assume interest rates may rise from their current low levels.

• not let borrowers rely on the possibility of rising house prices to claim they can eventually repay.

• assess interest-only mortgages as repayment ones, unless there is a "believable" source of money to pay off the loan. 

• "It's already hard enough for people to get on the ladder"

• Although lenders will still have to check income details in each mortgage application, the FSA is no longer proposing that a borrower undergoes a detailed check of how they spend their money, but only be given a broad assessment of their "committed and essential household expenditure" instead.

• Under the proposed new rules, interest-only mortgages can still be offered if there is a "credible" plan to repay the loan, which does not involve a borrower assuming he or she can eventually cash in on the rising value of their home.

• No lock-out 

• Existing borrowers who already have a loan that might be forbidden under the new rules, such as an interest-only loan, a self-certified one, or one with a very small deposit, will not be prevented from remortgaging.

"It's already hard enough for people to get on the ladder"

Although lenders will still have to check income details in each mortgage application, the FSA is no longer proposing that a borrower undergoes a detailed check of how they spend their money, but only be given a broad assessment of their "committed and essential household expenditure" instead.

Under the proposed new rules, interest-only mortgages can still be offered if there is a "credible" plan to repay the loan, which does not involve a borrower assuming he or she can eventually cash in on the rising value of their home.

No lock-out 

Existing borrowers who already have a loan that might be forbidden under the new rules, such as an interest-only loan, a self-certified one, or one with a very small deposit, will not be prevented from remortgaging.

Paul Broadhead Building Societies Association 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," the FSA said.

"We will allow lenders to waive the affordability rules when entering a new mortgage contract - providing the borrower has a good repayment history," it explained. 

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." 

"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".

"The FSA's new proposals seem to strike broadly the right balance," he said.

This article was provided by Paul Roome, Managing Director, of TIC Financial Services (UK) Ltd. 8 China Street, Lancaster, LA1 1EX.

If any of these issues affect you and you would like further information Paul can be contacted by the following methods:

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Email: paul.roome@tic-financialservices.com