Most of the tougher regulations on mortgages are designed to prevent reckless lending and will not come into force in April 2014, later than anticipated and some seven years after the recession began.
The FSA said that the rules, the outcome of its Mortgage Market Review (MMR), are designed to prevent future borrowers ending up with a mortgage they cannot afford.
‘These new rules will help create a more sustainable market that works well for everyone, whether they are a borrower or a lender. We recognise that many lenders are now using a far more sensible set of lending criteria than before, but it is important that these common sense principles are hard-wired into the system to protect borrowers,’ said Martin Wheatley, managing director of the FSA and chief executive office designate of the Financial Conduct Authority (FCA), one of the successors to the FSA.
‘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,’ he explained.
‘To ensure the measures are effective but practical we spent a great deal of time discussing our proposals with consumers, firms, parliamentarians and numerous other stakeholders. I am therefore very confident that we have come up with a set of rules that are proportionate and sensible, and will create a more sustainable mortgage market where consumers are put at the heart of every decision,’ he added.
All lenders will need to consider a borrower’s net income and committed and basic essential expenditure. Interest only mortgages can be offered to anybody who shows they have a credible repayment strategy but relying on rising house prices will not be enough. All mortgages lenders will also have to take into account the impact that future interest rate rises may have on mortgage repayment costs.
For all but the most straightforward transactions, most customers who are sold a mortgage on an interactive basis, that is face to face or over the phone, will need to be advised, meaning that they will only be recommended a mortgage that is suitable for their circumstances. The process will be more straightforward for mortgage professionals, high net worth individuals and business customers who can opt out of receiving advice.
There will be transitional rules for borrowers sometimes referred to as ‘mortgage prisoners’ so that lenders can make exceptions to the responsible lending rules for customers who need to remortgage, providing there is no increase in the outstanding amount to be repaid.
While most sales will have to be advised, advice will not be needed for simple contract variations providing there is no increase in the amount to be repaid.
High net worth borrowers, and business customers borrowing against their home will need a tailored approach. The FSA said that this will allow opting out of receiving advice and involve a less stringent affordability check because of their different characteristics and circumstances as compared with most other borrowers.
All customers will need to satisfy lenders that they can afford the mortgage, and provide evidence of their income. Most mortgage sales will require advice but new rules do not prevent higher loan to value lending, and interest only if the borrower can show that they have a credible repayment strategy.
