New rules to make mortgage borrowing tougher

The Financial Services Authority (FSA) has published its final Mortgage Market Review rules, aimed at ensuring there'll be no repeat of the boom years.

The FSA has outlined a series of measures to ensure that lenders are not able to offer mortgages which borrowers will struggle to pay.

These new measures are the final outcome of the regulator’s Mortgage Market Review, a process which has been going on for a couple of years now, in which the FSA has looked at ways to ensure a repeat of the excesses of the boom period are not repeated.

And after lengthy periods of consulting with the industry and interested parties, it has finally put together its new rules, most of which will come into force in April 2014.

Let’s take a look at the main changes:

Affordability and interest-rate stress test

Lenders will need to conduct far more detailed affordability checks. That means not just looking at the borrower’s net income but also “committed and basic essential expenditure”.

The FSA’s study suggested that between 2005 and 2010 “there was a significant number of households with a mortgage whose normal income may not be enough to cover their expenditure and mortgage payments in full”.

What’s more, it’s not enough for the lender to check you can afford the mortgage right now. They also need to factor in future interest rate rises.

Interest-only mortgages

Lenders will still be able to offer mortgages on an interest-only basis. However, they will only be allowed to do so if the borrower has a “credible repayment strategy”.

During the boom years, lenders didn’t always ask how you planned to pay off the capital of the loan once you reached the end of the term. And many borrowers didn’t need to worry too much – rising house prices meant they could sell up at the end of the term and have more than enough cash to pay off the mortgage, and put down a deposit on the next place.

Not anymore.

Lenders have already tightened up their interest-only lending significantly in the last few years, with Nationwide the latest to pull out altogether. It’s been suggested that interest-only mortgages are the next big mis-selling scandal. Recent research suggests there are £116 billion-worth of interest-only mortgages set to mature in the next eight years where the borrower has no repayment plan in place.

Mortgage prisoners

The FSA believes that as many as 55% of all mortgage borrowers are ‘mortgage prisoners’, meaning they are unable to remortgage or move house as they cannot meet the stricter lending criteria lenders have implemented since the credit crunch.

To try to help these borrowers remortgage, lenders are able to essentially ignore all of the new responsible lending rules, so long as there is no increase in the outstanding balance the borrower needs to repay.

Lenders will also be able to use these arrangements to take on borrowers from other lenders. In the FSA’s words, they will be presented from “treating [mortgage prisoners] less favourably than other customers”.

Advice

If you take out your mortgage on an ‘interactive’ basis – in other words, face to face or over the phone – then the process will have to be advised. That means that the person you are dealing with needs to ask you some questions about your circumstances to work out which mortgage is best for you.

Advice is a loose word though. If you go into your bank and take out a mortgage, you will absolutely get a form of advice. The advisor will take you through that bank’s mortgage range and work out which of its deals is best for you.

But that doesn’t mean you should go for that mortgage. To my mind, advice means hearing about all of the mortgages available in the market, not just from a single lender. That’s why I’ve always been a big advocate of getting independent mortgage advice from a broker.

There are exceptions though. If there is just a contract variation, so long as it doesn’t increase the amount being repaid, there will be no need for advice. Similarly mortgage professionals, high net worth individuals and business customers will be able to opt out of advice.

A sensible package

I’m pretty pleased with this new set of rules. The most impressive thing is that the FSA has actually listened to the views of the industry, who had lobbied extensively for allowances to be made for ‘mortgage prisoners’, high net worth borrowers and business customers. The regulator does not exactly have a great reputation for listening to the views of those on the front line, so that’s a welcome change.

But all of the suggestions are sensible. It’s absolutely right that lenders should be rigorous when deciding whether a borrower can afford a mortgage. And it’s really not good enough for those affordability checks to not take into account future interest rate rises. Many lenders have already taken steps in this direction, so these new rules are really just a way of ‘hardwiring’ this new attitude into the rules.

Similarly, it’s insane that lenders ever allowed a borrower to take out an interest-only mortgage without doing at least cursory checks on how that loan would be repaid at the end of the term. Again, most lenders have already made these changes.

Help for trapped borrowers and insisting on advice is also welcome.

You could argue that this is a case of closing the stable door long after the horse has bolted. And there’s some validity to that argument. But better late than never. At least now we know that a repeat of the lunacy of the boom years won’t happen.

What do you think of the final Mortgage Market Review rules? Do they go far enough? Let us know in the comment box below.

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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 8045 or email mortgages@lovemoney.com for more help.

This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article.

Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term may revert to the lender's standard variable rate or a tracker rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.

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