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Tough new mortgage rules announced

Regulator wants to stamp out mortgage ills of old

A mortgage deed being signed

Tough new rules to prevent a repeat of the mortgage market collapse seen five years ago have been announced by the Financial Services Authority (FSA) today.

The FSA’s proposals outlined in its mortgage market review will instill new rules that will ensure borrowers are only lent money they can afford to repay to prevent a return to the irresponsible lending that caused the credit crisis of 2007/08.

Which? supports the new proposals but wants the regulator and government to do more to support people who are trapped on high mortgage rates – dubbed ‘mortgage prisoners’.

Greater focus on affordability for mortgage deals

Under the new rules, lenders will have to place a much greater focus on the affordability of any potential loan offered to borrowers. A borrower’s income will have to be verified in every new mortgage application.

This process will put 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.

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 mortgage lenders will also have to take into account the impact that future interest rate rises may have on mortgage repayment costs.

Help for mortgage prisoners

A new proposal was announced by the FSA stating that lenders must not take advantage of a borrower who can’t get a mortgage elsewhere by treating them less favourably than other similar customers, for example, by offering them a worse interest rate or terms.

These borrowers – known as ‘mortgage prisoners’ because they do not have enough equity in their homes to get a better deal or can’t afford a new mortgage deal as their wages have stagnated – have been hit by increasing standard variable rates (SVRs) without being able to move to a new deal.

Research from Which? has found that more than 1.6 million people have been hit by increasing SVRs despite the Bank of England base rate remaining unchanged for more than three years, costing borrowers about £400m a year extra.

First-time buyers need more assistance

Although the FSA wants to tighten the rules on lending, it insisted that first-time buyers, typically with low deposits, should not be disenfranchised from buying a property using a mortgage.

Which? does not want a return to the days of irresponsible lending but would welcome a wider range of deals including more deals at high loan-to-value ratios.

Shocking irresponsibility laid bare

Additional data published by the FSA paints a damning picture of the mortgage market in the years leading up to the credit crisis of 2007/08 and the problems that borrowers are now facing.

  • At the peak of the market (2007/2009), over half of all mortgages were granted without proper income checks.
  • As a result of lenders already tightening up borrowing criteria, up to 45% of borrowers who have taken out a mortgage since 2005 could be mortgage prisoners.
  • Some 10% of people who borrowed between 2005 and 2011 could be in negative equity, including over 20% of first-time buyers.
  • Around 41% of all loans secured on homes are currently on an interest-only basis.

Major change needed in the mortgage market

Peter Vicary-Smith, chief executive of Which?,  said: ‘Proposals for banks to conduct an affordability test will hopefully prevent a return to the irresponsible lending of the past. But it’s disgraceful that banks encouraged so many people to borrow more than they could afford without proper checks. The banks have a responsibility to help these people who are now struggling through no fault of their own.

‘The housing market is failing not just one but two generations of consumers, with many mortgage prisoners trapped with their current lender and young people excluded from the housing market altogether.

‘Transitional rules to protect mortgage prisoners are a good start but the regulator needs to go much further to make sure banks are fair to hard pressed borrowers trapped on standard variable rates and exposed to rising mortgage payments.

‘More than 1.6 million people have been hit by increasing SVRs despite the Bank of England base rate remaining unchanged for more than three years. The banks must pass on lower borrowing costs from the government’s Funding for Lending scheme.’

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