Tough new proposals aimed at stamping out irresponsible lending will be published today by the Financial Services Authority after a two-year review of the mortgage market.
The proposals – which are open for comment until March next year and will come into force in 2013 – would lead in their current form to one in 40 people currently with a mortgage being unable to qualify under the new rules. But the FSA will introduce transitional arrangements to allow non-qualifying homeowners to remortgage as long as they have a good repayment history.
The key to the new proposals is what the FSA terms "three main principals of good lending". First is that lenders should assess affordability and advance mortgages and loans only where there is a reasonable expec- tation that the customer can repay without relying on uncertain future house price rises.
Next, the watchdog says the affordability assessment should allow for possible rises in interest rates. Lenders will have to "stress-test" loans and calculate whether borrowers would still be able to afford them if interest rates were to rise in the next five years.
Finally, the FSA says interest-only mortgages – which have forced many people into negative equity since the house price slump – should be assessed on a repayment basis unless there is a strategy for repaying out of capital resources.
Lord Turner, the chairman of the FSA, said: "While the excesses of the pre-crisis period have largely disappeared from the current market, it is important to ensure that better practice endures in future when memories of the crisis recede."
Self-certified loans – which allowed borrowers to get a mortgage without having to prove the ability to repay – have already been outlawed by the regulator, but its new proposals will outlaw the idea of "no-advice" sales. In future borrowers will have to take advice, apart from high-net-worth individuals who will be allowed to opt out.