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New mortgage clampdown is five years in the making, but is it too late?

The watchdog's rules will make it harder to borrow but the damage may be done.

Tough lending rules are being introduced to ensure no one ends up borrowing more than they can afford. But the publication of the proposals by the Financial Services Authority this week provoked a storm of protest. The City watchdog said it intends to put "common sense" at the heart of the mortgage business under the shake-up, which comes into force in April 2014.

But experts lined up to criticise the proposals. James Moss, managing director of Curzon Investment Property, said: "It's shutting the door after the horse has bolted. The credit crisis was caused by banks throwing mortgage cash at consumers. The banks took a bath and this has been largely checked through. But once again it's the consumer who will be the fall guy."

He pointed out that the government is desperate to kick-start the depressed UK housing market and, with that in mind, banks need to lend. "But these new measures are very draconian and will simply repress the very housing recovery the Chancellor keeps saying he wants to spur on. You can over-regulate as well as under-regulate and these measures appear very excessive and out of balance for the consumer," he said.

But Which? chief executive Peter Vicary-Smith welcomed the tougher rules: "Proposals for banks to conduct an affordability test will hopefully prevent a return to the irresponsible lending of the past," he said.

"It's disgraceful that banks encouraged so many people to borrow more than they could afford without proper checks. The banks have a responsibility to help these people who are now struggling through no fault of their own. The housing market is failing not just one but two generations of consumers, with many mortgage prisoners trapped with their current lender and young people excluded from the housing market altogether."

The FSA first looked at reforming the mortgage market three years ago.

Many experts have pointed out that tighter lending practices will penalise anyone stuck on an expensive loan who may not be able to switch to a better deal because of the strict new rules. This could particularly hit those with interest-only loans. To counter the criticism, the FSA has demanded that lenders must not unfairly treat existing borrowers and must make the better deals available to them.

It will allow lenders to effectively switch off the requirements for existing borrowers who wanted to get a new mortgage for the same amount or less, provided they had a good repayment history.

That's good news for all those borrowers who've been trapped by tighter affordability requirements — the so-called mortgage prisoners — said Brian Murphy, head of lending at Mortgage Advice Bureau.

"With immediate effect lenders have been told to use their judgment on affordability requirements. That will prevent lenders offering less favourable interest rates or other terms and allow more borrowers to remortgage and even move lender."

Under the new rules interest-only mortgages will only be offered to people with a firm repayment plan, rather than simply hoping that house prices will rise enough for borrowers to be able to pay off the mortgage and use the profit to buy a smaller home.

Lenders will also have to take account of the impact of future interest rate increases on repayment costs. The watchdog said its new rules would not stop lenders being able to offer low-deposit mortgages to first-time buyers. It also said there would be no upper age limits imposed on borrowers.

Martin Wheatley, managing director of the FSA, said: "It is important that these common-sense principles are hard-wired into the system to protect borrowers. We want them to feel confident that poor practices of the past, which led to hardship and anxiety, are not repeated." The Council of Mortgage Lenders welcomed the rule changes.

Paul Smee, CML director general, said: "The regulatory changes have already been widely anticipated and so are unlikely to create any significant additional or unexpected impacts."

Paul Broadhead, head of mortgage policy at the Building Societies Association, said: "No one can argue with the objective that lenders lend what consumers can afford to repay. It is common sense that a mortgage should be repayable from income, rather than rely on increasing property prices, and this is the approach that building societies and other mutual lenders already take."

He said it was also good that interest-only mortgages can still be made available for some people.