Mortgage borrowers must prove their earnings and take advice on their choice of loan to make sure poor practices of the past are not repeated
Mortgage lenders will be forced to verify would-be borrowers’ incomes and check there is a credible repayment plan in place if they apply for an interest-only mortgage under rules the City regulator says will “hard-wire common sense into the mortgage market”.
From April 2014, anyone applying for a new home loan will be expected to prove how much they earn rather than the lender simply asking them to state their salary. At the same time, lenders will be expected to be able to demonstrate that a borrower can afford mortgage repayments after paying tax and their regular household bills, and will only be able to grant interest-only loans if a borrower has a clear repayment plan in place.
The rules, outlined by the Financial Services Authority (FSA) following a three-year review of the mortgage market, are designed to stop borrowers taking on loans they cannot afford.
As well as rules on lending they also deal with mortgage advice, and state that in future all borrowers who apply for a loan via a branch or phone will be required to take advice on their choice of loan, unless they earn more than £300,000 or work in the mortgage industry.
The changes will sound the death knell for self-certification mortgages, which allowed borrowers to take out loans based on a stated income that went unchecked by lenders. These were popular in the property boom years and although designed to help self-employed borrowers without a complete set of accounts were misused by some who wanted to maximise how much they could borrow.
They will also have an impact on older borrowers who will need to be able to prove they can afford repayments after they have finished work, although the regulator did not, as was suggested in some quarters, recommend an age limit on lending.
“Contrary to some reports the over-50s won’t be ‘banned’ from getting a mortgage under the new rules. Consumers will, however, be faced with more detailed questions and the need to demonstrate they can afford a loan – the application process may also take rather longer than it does today,” said Paul Broadhead, head of mortgage policy at the Building Societies Association.
Broadhead said the rules were “sensible” and the FSA had “been very careful to keep the market open for self-employed borrowers and first-time buyers”. However, he warned that lenders would need to be reassured about how the rules would be implemented to stop them acting too cautiously towards borrowers.
Since the FSA announced its first take on the rule changes in December 2011 lenders have started to alter criteria, with some already imposing tight restrictions on interest-only mortgages and others, like Nationwide building society and Co-op Bank, ruling them out altogether.
Martin Wheatley, managing director of the FSA and CEO-designate of the Financial Conduct Authority which will replace it, said: “We recognise many lenders are now using a far more sensible set of lending criteria than before, but it is important these common sense principles are hard-wired into the system to protect borrowers.
“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.”
The FSA has addressed the issue of so-called mortgage prisoners – borrowers who are already on deals set-up on an interest-only basis or with other requirements who will not qualify for mortgages under the new rules – by telling lenders they can make exceptions for customers who need to remortgage, providing there is no increase in the outstanding amount to be repaid.
Which? chief executive Peter Vicary-Smith 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.”
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