The Financial Services Authority (FSA) has published proposed new rules designed to reduce the risks associated with mortgage lending.
The rules, which are likely to come into force in 2013, aim to stop home buyers from borrowing more than they can comfortably afford to repay.
It is believed that excessive and irresponsible mortgage lending (and borrowing) was a contributory factor to the recent global financial crisis.
Whilst mortgage lending practices here in the UK were not as loose as those in the United States, too many borrowers were obtaining large mortgages without sufficient evidence of affordability or status.
The new rules mean that lenders will have to be a better job in assessing the affordability of mortgage loans.
This new affordability assessment regime will include the assumption that interest rates will rise, with some form of cashflow modelling to consider the impact of higher interest rates in the future.
They will also prevent borrowers from relying on the expectation of rising house prices as a method for repaying loans.
Mortgages on an interest-only basis will be assessed from an affordability perspective as if though they were capital repayment mortgages, unless the borrower can demonstrate they have a source of wealth to eventually repay the loan.
Lenders will also need to assess how borrowers are spending their money, with a broad assessment of “committed and essential household expenditure” needing to take place.
There is some protection within the new rules for people with an existing mortgage who would not satisfy the new affordability requirements.
Lenders will be able to offer new mortgages to existing customers, with the new affordability rules waived when the borrower has a good repayment history.
Another new requirement being introduced by the rules is a ban on non-advised mortgage sales where there is any “spoken or interactive dialogue” between the adviser and customer.
This will mean that advisers will have to consider suitability and affordability for each individual customer, rather than simply providing information on the range of mortgages available.
Borrowers will still be able to reject the advice they have been given and proceed with a mortgage on an execution-only basis. This is a big rule change as around half of all mortgage transactions currently take place on this non-advised basis.
Whilst we do not provide mortgage advice here at Informed Choice, the cost of borrowing and methods to repay mortgage debt are included in the plans we help our clients to create.
We welcome these new rules on mortgage affordability and advice; it is just a shame that they were not introduced around five years ago.
Photo credit: Flickr/R~P~M
