Getting a mortgage is about to get tougher

New rules from the FSA will make it harder for all of us to get our hands on a mortgage - do they go too far?

Fresh from being granted a reprieve by the Coalition Government – the Tories had wanted to completely do away with the FSA – the UK’s financial regulator is starting to flex its muscles over the mortgage market.

Last week, it unveiled new proposals to clean up the mortgage arena, by clamping down on irresponsible lending and ensuring borrowers only take on mortgages they can afford.

All sounds very sensible, but the proposals have led to warnings that mortgages will become far more expensive, and inaccessible to many.

The new proposals

So what have the FSA actually proposed?

First up is requiring the verification of income on all mortgage applications, bringing to an end self-certification mortgages (though in fairness there haven’t been any self-cert mortgages available for some time).

It will no doubt come as a surprise to many of you that some lenders didn't check the stated income was correct for all borrowers, but according to the FSA at the end of 2008 a staggering 52% of mortgages went through without the income of the borrower being fully checked. Even today, 43% of mortgages are processed in this fast-track fashion.

The FSA has also suggested there should be extra affordability tests for all mortgages to ensure a borrower is only taking on what they can afford, as well as making the lender ultimately responsible for assessing a borrower’s ability to pay.

So why have such seemingly obvious changes got so many people within the mortgage market so upset?

More expensive mortgages

Lenders and brokers have been falling over themselves to warn that these new rules will make mortgages far more expensive.

Because the new affordability checks are pretty stringent – independent proof of income will be necessary, through company records and tax returns – the lenders will need to spend longer on going through that documentation to check its veracity. And of course, for the lenders to perform these extra checks will cost money.

The critics reckon that those additional costs will be passed onto borrowers in the form of higher interest rates on mortgages.

In other words, we’ll be paying for the lenders to be doing what they should have been doing in the first place.

Mortgages out of reach

What’s more, the new affordability tests may go too far, preventing borrowers from being able to access finance.

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The FSA wants lenders to assume borrowers will be taking out their mortgage on a capital repayment basis over a term of 25 years. However, plenty of first-time buyers will actually go for a longer term on their first mortgage, to ensure it is affordable – I know I did. To try to apply a one-size fits all approach to something as individual as whether you can afford that specific mortgage is asking for trouble, in my view.

The Council of Mortgage Lenders, the lender trade body, argues that the FSA’s “proposed conservative approach” may trap struggling households in their existing mortgage, eliminating the possibility of remortgaging to a cheaper deal. That option may be the difference between clawing their way out of their money troubles and retaining ownership of the home, or falling deeper and deeper into arrears until the home is repossessed.

Brokers have also argued that lenders have already ramped up their affordability tests since the onset of the credit crunch, making these changes unnecessary.

Vested interests

Undoubtedly there will be comments from readers on this arguing that of course the lenders and brokers don’t like these changes, as they will make their lives harder. And there is certainly an element of that.

The FSA also does at least seem to have its priorities right in wanting to ensure that lenders act more responsibly, and that borrowers who are tempted to take on more than they can handle, or commit fraud – and there have been plenty who have done just that – are prevented from doing so.

However, I do worry that the critics may have a point.

The number of mortgages being approved through 2010 has been pretty modest as it is, and these new rules will only further dent approval levels. And that is not exactly a good thing – the harder it is to get a mortgage, the more bumps in the road there will be when you’re involved with a chain and trying to move up or down the housing ladder. The whole thing could grind to a halt.

That could put downward pressure on house prices. But then again, you may think that's a good thing - and long overdue.

The importance of advice

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• John Fitzsimons writes:

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Whether you think the FSA is right or wrong, for me, these changes only serve to reinforce why it is so important to take advantage of the services on offer from mortgage brokers.

By using a mortgage broker, you’ll not only get independent advice on which type of mortgage is best for you, but also on how different lenders are likely to look at your application, as you can guarantee there will still be some variances in how strict the criteria is applied from lender to lender.

A broker will also ensure you get all the correct information together ready in time for approval.?

At lovemoney.com we have our own fee-free mortgage service, with brokers here to talk you through any issues you may have, large or small, via email, telephone and even instant messenger. They're good guys, and you can trust them to get you the best deal possible.

More: You're better off ignoring Northern Rock | Buy a home with a 5% deposit!

At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 4045 or email mortgages@lovemoney.com for more help.