Money Insider: Regulator pushes affordability tests for loans
Saturday 24 October 2009
The Financial Services Authority this week unveiled a raft of new proposals as part of its much-anticipated Mortgage Market Review. The additional burden of red tape from the regulator has been criticised by some as too little too late; however there are elements within the 118-page review that look positive.
Apart from the regulation of buy-to -let mortgages and an overzealous blanket ban on self-certified mortgages, one of the main areas of focus is whether a customer can afford to manage their borrowing. The FSA is pushing for affordability tests for all home loans, and making lenders accountable for checking a borrower's ability to repay their mortgage.
Conducting a more extensive budget assessment as part of the mortgage application process and making the effort to verify the figures provided will help reduce levels of arrears related pain for borrowers and is a positive move. Many lenders will argue that they have for some years already been checking a prospective customer's ability to repay rather than using the simpler but less effective income multiple measure favoured by some.
At least there will no longer be confusion as to whether or not a broker has verified a customer's income and expenditure, as the buck will stop firmly with the lender under the new proposals.
The new regulations may in some cases mean lenders doing less business, but it's high time that accurate, verified affordability became a key measure rather than some mortgage providers adopting an inflexible and broad-brush loan-to-value policy.
Mortgage war simmering, but too early to hang out bunting
Lenders continued to chip away at mortgage rates this week, but the rate reductions and new launches to 80 per cent loan-to-value (LTV) don't by any stretch of the imagination warrant some of the "everything's rosy again in the mortgage market" media hype: far from it.
It's proving to be a slow but gradual return to some sort of normality with more lenders prepared to tinker with product rates over and above the ultra-cautious 60 per cent or 70 per cent LTV mark.
Estate agents and others with a vested interest will look to talk the market up at every opportunity. But the reality for many homebuyers is that they are faced with paying a massive interest rate premium even though they may have equity amounting to one-fifth of the value of their home.
Both Northern Rock and Post Office launched new 80 per cent LTV mortgages this week, with the pick of the bunch from the latter being a 5.75 per cent five year fix with a below average £599 fee.
It was also good to see Woolwich cutting the rate on its 80 per cent LTV two year fixed rate by 0.5 per cent to 5.49 per cent with a £999 fee. But the 70 per cent LTV mortgage from the same lender is priced a full 1.7 per cent lower at 3.79 per cent. To put this into perspective, for someone borrowing £150,000 (on a 25-year term) the additional cost is an eye-watering £146 per month, or a smidgeon under £3,500 over the two year fixed term.
Reports that valuers have been erring on the side of caution when assessing the value of property will only mean more customers finding themselves paying over the odds for slipping the wrong side of the 70 or 75 per cent LTV barrier.
If you look hard enough it's possible to find a couple of sub five per cent best buy rates at 80 per cent LTV fixed for two years, with Loughborough Building Society offering 4.75 per cent with a £475 fee and Manchester Building Society with 4.99 per cent and a £695 fee. Even though the banking giants have more advertising clout and a far bigger high street presence, a number of building societies are still punching above their weight with cheaper deals and continue to feature prominently in the best buy tables.
Fixed-rate savings update
It's been much quieter than of late for the savings market with only a couple of products warranting a mention this week.
The fixed rate savings market is still the area where most of the activity seems to be taking place. This week the Hinckley and Rugby Building Society launched a three year fixed rate savings bond paying a very competitive 4.65 per cent AER if you've got £25,000 or more to lock away. For those seeking a shorter tie in for their savings, Julian Hodge Bank upped the rate on its one year fixed rate Capital Millennium bond to 3.7 per cent AER and is available from £1,000.
Best buy positions for shorter term fixes are currently 3.75 per cent AER for one year with SAGA (over-50s only), 4.35 per cent AER with AA online for two years and 4.7 per cent AER for three years with both ICICI Bank UK and Yorkshire Building Society's Barnsley brand.
Andrew Hagger is a money analyst at Moneynet.co.uk
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