Time for responsible lending
New proposals from the FSA could see a return to more responsible lending in the UK, with more stringent requirements to assess affordability and verify income before a mortgage is offered.
The main aim of the new rules is to ensure that only those who can truly afford to meet their debt obligations will be able to borrow money.
One proposal to ensure affordability is to assess the ability of the borrower to meet mortgage obligations assuming a repayment mortgage, even when they are borrowing on a cheaper interest-only basis. Most lenders already calculate affordability on this basis, but it would represent a change for some.
The proposals could also signal the end of the ‘self certification’ mortgage, with borrowers having to prove their income levels rather than simply tell the lender what they earn.
Research from the FSA found that around half of all mortgages are sold without income being verified.
As the UK economy enters an age of austerity, moves by the FSA to force more responsible mortgage lending could have an impact on the residential property market, particularly if first time buyers have to wait for longer to get onto the property ladder.
The Council of Mortgage Lenders has said it recognises the inevitability of regulatory change, but warned that there may also be unwelcome side effects for borrowers.
They point to a slower and more costly mortgage application process, with the lender having to scrutinise documentary evidence before a home loan can be approved.
These proposals form part of a tougher approach to mortgage regulation being adopted by the FSA.
They also have plans to subject mortgage advisers to the same level of regulatory supervision as investment advisers. This includes applying the ‘fit and proper person’ test to those individuals selling mortgages; something that can only be good news for consumers who can often be exposed to less than professional behaviour when receiving mortgage advice.