The Financial Services Authority (FSA) has proposed a raft of new mortgage market standards to prevent irresponsible lending to consumers, protecting them from the risks of falling house prices.
Wholesale changes to the mortgage market
The Mortgage Market Review that sets out to make the process of lending more rigorous. Which? is supportive of the plans, although we believe that further measures are required around transitional arrangements for existing borrowers.
Under the proposals, prospective borrowers will have access to additional information and advice on their mortgages, while also being subject to more thorough checks.
The FSA said lenders should only arrange mortgages for borrowers when there is a ‘reasonable expectation’ they can repay the loan without relying on future house price rises or interest rates remaining where they are or lower.
Income under scrutiny
A borrower’s income will have to be verified in every new mortgage application, with large household bills also under consideration, putting an end to so called ‘fast-tracked’ and ‘self-certification’ mortgages, in which applicants provided basic details of their income without much inspection or verification.
Which? believes that the Mortgage Market Review should help to bring long-term stability to the mortgage market, thanks to new restrictions on interest-only lending (which will only be available for those with repayment vehicles or access to capital) and interest rate stress tests.
Few first time buyers affected
The FSA consultation paper says that between 2.5% of mortgages would be affected by the new requirements in a subdued period, rising to 11% in a booming period of mortgage lending.
Many will still be able to get mortgages, but may not be able to borrow as much as they originally wanted. The FSA stated that only a minority of those affected will be first-time-buyers.
Existing borrower rules
The FSA is proposing that lenders do not have to apply the new affordability requirements in cases where there is no additional borrowing and the borrower’s monthly mortgage repayments will be the same or less as current payments. This will also apply where the borrower has been meeting payments for the last 12 months.
Which? wants stronger protection for existing customers and lenders should be allowed to waive the new criteria in cases where borrowers move from a variable to a fixed rate mortgage, even if the repayment is higher.
Which? also believes that separating couples need to be able to remove one partner from the mortgage without losing their right to transitional arrangements, which is not addressed under current proposals.
The consultation is open until 30 March 2012 with the FSA Board set to deliver final rules next summer.