FSA Seeks Feedback on Mortgage Market Shakeup
January 12, 2012
In December 2011, the Financial Services Authority (FSA) unveiled initial details of proposals to change the rules on mortgage lending. The Mortgage Market Review consultation paper outlines the FSA’s initial thoughts, which will be finalised in summer 2012 before being implemented from 2013.
The thrust of the proposed new rules is a stronger focus on evidence of affordability and the ability to repay the mortgage. The FSA maintains that loans should only be advanced where there is a ‘reasonable expectation that the customer can repay without relying upon future house price rises’.
This means an end to self-certification mortgages as income will need to be verified in every mortgage application. Borrowers should expect to provide payslips and evidence of regular commitments such as loan and credit card bills.
Lenders will estimate a borrower’s realistic disposable income, taking into account expenditure on essentials such as food, heating and council tax. They will also be required to factor in potential interest rate rises when assessing affordability, looking at a five year horizon.
The FSA has stepped back from an out and out ban on interest-only mortgages, saying that they could still be offered. But borrowers will need to demonstrate a credible plan for repaying the loan capital; otherwise they will be assessed on a repayment basis. Relying on the hope of increasing property values, an assumed inheritance or ad-hoc cash payments will not be enough.
In a bid to protect existing borrowers, provided that they have managed their mortgages and repayments appropriately for the preceding 12 months, lenders will be allowed to flex the new rules. Such borrowers would be allowed to remortgage to a new mortgage product or move their existing mortgage to a new property even if their income did not match the new rules on affordability. However, they would not be allowed to borrow any additional capital.
Commenting on the proposed new rules, Jane Reeves, Head of Young Finance, points out;
“It’s unlikely that borrowers will see a step-change in lending criteria when the FSA’s new lending rules are implemented in mid-2013 simply because lenders have already adopted tighter criteria in a bid to limit their lending risk.
“What the FSA’s suggested new rules do mean is that lenders will be forced to stick to these tougher criteria when the market does eventually pick up.”
The FSA is inviting feedback on the Mortgage Market Review until 30 March 2012. Comments can be submitted directly to the FSA online.