By Daniel Hunter
The Financial Services Authority (FSA) has published new rules that put common sense at the heart of the mortgage market and will prevent future borrowers ending up with a mortgage they cannot afford.
The new rules, the outcome of the FSA’s Mortgage Market Review (MMR), will come into effect on 26 April 2014. One measure will be activated immediately to help borrowers who might be trapped by today’s tighter lending criteria.
“These new rules will help create a more sustainable market that works well for everyone, whether they are a borrower or a lender," Martin Wheatley, managing director of the FSA and CEO-designate of the Financial Conduct Authority (FCA), said.
“We recognise that many lenders are now using a far more sensible set of lending criteria than before, but it is important that 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.
“To ensure the measures are effective but practical we spent a great deal of time discussing our proposals with consumers, firms, parliamentarians and numerous other stakeholders. I am therefore very confident that we have come up with a set of rules that are proportionate and sensible, and will create a more sustainable mortgage market where consumers are put at the heart of every decision.”
The majority of proposals published in December 2011 are unchanged. Therefore, for all mortgages, lenders will need to consider a borrower’s net income, and committed and basic essential expenditure. Interest-only mortgages can be offered to anybody who shows they have a credible repayment strategy - but relying on rising house prices will not be enough. All mortgages lenders will also have to take into account the impact that future interest rate rises may have on mortgage repayment costs.
For all but the most straightforward transactions, most customers who are sold a mortgage on an interactive basis, i.e. face to face or over the phone, will need to be advised, meaning that they will only be recommended a mortgage that is suitable for their circumstances. The process will be more straightforward for mortgage professionals, high net worth individuals and business customers who can opt out of receiving advice.
In light of feedback received during the consultation, the FSA has re-thought its approach on a number of areas. The main changes to the MMR are therefore as follows:
· Transitional rules (affecting borrowers sometimes referred to as ‘mortgage prisoners’) - enabling lenders to make exceptions to the responsible lending rules for customers who need to remortgage, providing there is no increase in the outstanding amount to be repaid.
· Advised sales - clarifying that while most sales will have to be advised, advice will not be needed for simple contract variations - providing there is no increase in the amount to be repaid.
· High net worth borrowers, and business customers borrowing against their home — confirming that these types of customers require a tailored approach. This will allow opting out of receiving advice and involve a less stringent affordability check because of their different characteristics and circumstances as compared with most other borrowers.
The effects of the new rules on different types of borrower are as follows:
· All customers - all customers will need to satisfy lenders that they can afford the mortgage, and provide evidence of their income. Most mortgage sales will require advice, particularly interactive sales (such as face-to-face or telephone sales). The new rules do not prevent higher loan-to-value lending, and interest-only will be allowed if the borrower can show that they have a credible repayment strategy.
· First time buyers - the new rules do not prevent higher loan to value mortgages being offered.
· Existing borrowers that cannot meet the new affordability requirements - lenders can ‘switch off’ the affordability and interest-only requirements for existing borrowers who want to get a new mortgage for the same amount or less, providing they have a good repayment history. While any lending decision is a commercial one, lenders will also be able to use these arrangements to take on the customers of other lenders. Lenders will, with immediate effect, be prevented from treating these customers less favourably than other customers.
· Older consumers - the new rules do not apply any age limits or prevent lending to older consumers, including beyond retirement.
· Self-employed - the new rules give lenders flexibility to decide what type of evidence of income to accept from self-employed customers.
· Entrepreneurs (i.e. business people borrowing against their homes) - a flexible approach applies and these borrowers will be able to secure a mortgage on an execution-only basis providing they confirm they are happy to ‘opt out’ of the suitability tests. Lenders must see a credible business plan before providing a mortgage.
· Right-to-buy - customers who are exercising their right-to-buy will always be required to get mortgage advice.
· Shared equity - customers who are also getting a second charge shared equity loan to assist in their property purchase will need to be able to afford the payments on the shared equity loan as well as their mortgage.
· Credit-impaired borrowers - our rules do not prevent customers with an impaired credit history from getting a mortgage, as long as they can afford it. Where they are consolidating debt they must get advice.
· High net worth customers - a flexible approach applies and these borrowers will be able to secure a mortgage on an execution-only basis providing they confirm they are happy to ‘opt out’ of the suitability tests.
Separate to these changes, the FSA is carrying out an analysis of existing interest-only borrowers to see how many may be unable to repay the capital and understand what steps lenders are taking to address this issue. The FSA expects to publish the findings of this piece of work in the first quarter of 2013.
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