In an effort to avoid the type of risky lending that characterised much of the noughties, the FSA has launched a consultation that aims to seek views on its proposed reforms to mortgage lending. The purpose of the reforms is to ensure that mortgage lending is driven by a commonsense approach so that the financial catastrophe suffered by some people who over-borrowed against the assumption that house prices could only rise, could be avoided in future.
The proposed reforms have already been redrafted following feedback from lenders, consumers and other stakeholders and the FSA is asking for all interested parties’ opinions on this new, full set of proposals by 30 March 2012. The reforms should see mortgage lenders carrying out proper checks on borrowers to confirm that they can afford their proposed mortgage as well as ensuring that all prospective borrowers are given correct, timely information to help them make an informed decision.
Three principles of good lending practice lie at the core of the consultation, with the FSA proposing to make these rules:
Lenders must check that prospective borrowers can afford their mortgage or loan without relying on future house price rises;
Lenders must factor in future interest rate rises when assessing the affordability of the mortgage or loan: borrowers need to consider the impact of rising interest rates when deciding if they can afford the mortgage or loan; and
Interest-only mortgages should be assessed on a repayment basis providing borrowers have a credible plan to repay the capital that does not rely on rising house prices.
Key features of the proposed future regime include:
Income will have to be verified in every mortgage application;
Lenders do not have to consider in detail what borrowers spend but cannot ignore unavoidable bills, such as heating and council tax;
Interest-only mortgages can still be offered as long as borrowers have a credible plan to repay capital that does not rely on rising property values;
Lenders will have to consider the impact of increases in interest rates in line with current market expectations;
Applicants trying to consolidate debts with a mortgage, will have to get advice to ensure they understand the full implications and costs; and
Existing borrowers will be unaffected and lenders can provide new mortgages to some existing customers even if they do not meet the new affordability requirements.
The FSA’s intention is to have these rules in place before any economic upturn tempts a return to the property speculation that caused so much financial misery. The FSA Board will make a decision on the final form of rules this summer, but will not implement them before 2013. You can submit your response to the proposals via the FSA website.
If you have any queries about this consultation or any more general concerns about the proposed reforms, please contact
Susan Hopcraft.
