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Property experts warn that new financial rules in UK could slow down real estate recovery

Under proposals published by the Financial Services Authority self certified mortgages where income is not verified will be banned and those seeking loans will have to account for how they spend their income more rigorously including how much they fork out on alcohol, tobacco, clothing, shoes and eating out.

Experts are warning that many property owners would struggle to remortgage under the FSA proposals which would mean that banks and building societies would have to assess all mortgage applicants on the basis of their ‘free disposable income’.

‘If the FSA tightens up on what lenders are allowed to do, people could well be pushed over the edge.

This could cause consumer detriment.

Bringing in too strict rules on affordability is going to be a real problem,’ said Ray Boulger of mortgage broker John Charcol.

‘The overall impact will be to reduce the amount of mortgage finance and slow any recovery in house prices,’ added Boulger.

At the peak of the real estate boom in 2007 some 45% of applications were non-income verified including and around 10% of borrowers were self-certified which meant they did not need to provide proof of income.

Vince Cable, Liberal Democrat Treasury spokesman, said there needed to be a distinction between existing mortgage holders struggling to renew who clearly need help and those chasing new mortgages.

‘The climate has changed for re-mortgagers. Some will have no choice but to move on to their lender's standard variable rate and slowly repay debt until they can meet the affordability criteria,’ said Katie Tucker, a broker at Mortgageforce.

But the FSA denied that its new rules will necessarily make it harder for those wishing to re-mortgage.

‘I’m not sure it will be the case that a lot of people will struggle to remortgage,’ said Jon Pain, FSA managing director of supervision.

‘The mortgage market has seen extraordinary upheaval over the last 18 months and whilst it has worked well for the vast majority of borrowers, some have suffered great financial distress.

We recognise that we need to bring about a step change in regulation and we need to act now,’ he added.

He explained that the kind of irresponsible lending practices seen in the market until recently had to be stopped and the aim was to ‘dampen down some of the froth’ in the market. ‘If that produces a more stable market, that would be good,’ he added.

The proposals are contained in a discussion paper that is open for consultation until 30 January 2010 and the FSA will be actively seeking views from consumer groups and the industry.