New mortgage rules will affect 9m UK households with an existing mortgage
Thursday 25 October 2012
Toughened mortgage lending rules to make sure borrowers can only take out deals they can afford and prevent any return to irresponsible lending have been outlined by the financial services regulator.
The shake-up, which comes into force in April 2014, is the result of a long-running review by the Financial Services Authority (FSA), aiming to put "common-sense" at the heart of the market.
The FSA also announced a new rule which takes effect from today, stating that lenders must not take advantage of a borrower who cannot get a mortgage elsewhere by treating them less favourably than other similar customers, for example by offering them a worse interest rate or terms.
It said this would help protect people who were already stuck with their current lenders, as well as those who may become trapped when the new rules came in.
From 2014, lenders will need to consider a borrower's income and outgoings and interest-only mortgages will only be offered to people with a firm repayment plan, rather than relying on hopes that house prices will rise.
They will also have to factor in the impact that future interest rate increases could have on repayment costs.
The new rules will affect the nine million UK households which have a mortgage as well as many people in the rental sector who are already struggling to buy a home.
The FSA insisted its rules would not stop lenders being able to offer low-deposit mortgages to first-time buyers and there would be no upper age limits imposed.
Martin Wheatley, managing director of the FSA 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."
The Council of Mortgage Lenders (CML) previously raised concerns that many more existing borrowers could find themselves trapped under the new rules.
The FSA has now altered its plans so that lenders would be able to "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.
The clampdown follows a period during the property boom when would-be buyers increasingly stretched their finances to get on the ladder.
Last year, a house was worth around five times the buyer's income on average, compared with 3.7 times a decade ago.
Shelter found last year that 42% of borrowers sometimes found it hard to make mortgage payments, with 14% struggling constantly.
The regulator estimated that as a result of lenders already tightening their borrowing criteria, up to 45% of borrowers who had taken out a deal since 2005 could be mortgage prisoners.
Roughly half of them were thought to be trapped due to their credit problems and the other half because interest-only and low-deposit deals had become more restricted.
The FSA has previously warned that a "ticking time bomb" has been created over the last 20 years, with an estimated 1.5 million interest-only loans worth around £120 billion due for repayment in the next decade.
Such deals allow borrowers to pay off the capital only when the mortgage term ends, but lenders have abruptly cut back on them amid concerns people cannot afford to pay them back.
The FSA is looking at how many interest-only borrowers will be unable to repay their loans and plans to publish its findings next spring.
The CML welcomed the FSA's changes to rules which could have been "unduly restrictive".
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 (BSA), 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."
Mr Broadhead said it was also good to have had confirmation that interest-only mortgages can still be the right product for some people.
Campbell Robb, chief executive of Shelter, said: "We very much welcome the role this review will play in protecting families from taking on debts that are simply not sustainable.
"At Shelter we know only too well the damage that reckless lending can cause and the lives that are ripped apart by the pain of repossession.
"The biggest barrier to home ownership in this country is not regulation of the mortgage market, but the sky high cost of housing due to decades of under-investment in building new homes."
Which? chief executive Peter Vicary-Smith said it was "disgraceful" that so many people were encouraged to borrow more than they could afford.
He said: "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."
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