Tough new mortgage rules relaxed

The City watchdog showed signs today of easing the tough affordability criteria lenders must use as part of its overhaul of the mortgage market.





The Financial Services Authority (FSA) was intending to force lenders to assess whether borrowers could afford a mortgage based on a 25-year repayment loan, even if the mortgage was being taken out over a longer period or on an interest-only basis.



But the regulator appeared to backtrack today, when it acknowledged that its proposal "may not be appropriate, given the range of different individual circumstances".



It said: "We recognise the need not to take a 'one size fits all' approach and the need to balance the advantages of simplicity against those of flexibility."



The FSA added that it did not plan to ban interest-only mortgages, as had been feared at one stage, although lenders are still likely to have to take into account whether borrowers have a credible repayment plan in place when assessing affordability.



As part of the Mortgage Market Review, the regulator is putting a far greater emphasis on lenders to ensure that borrowers can afford their repayments, particularly if interest rates rise.



In its business plan for the coming year, which was published today, the FSA said a "tail of poor lending" had led to consumers taking on mortgages that were either unaffordable at the time or were at a significant risk of becoming unaffordable in the future.



It added that a report by the Bank of England found that 18% of borrowers constantly struggled to pay their bills or had missed repayments.



But the Council of Mortgage Lenders warned last year that around 45% of people taking out a mortgage during the past 12 months would have been hit by the new measures if they had already been in force.



The FSA sought to ease these concerns today, saying that in introducing the new rules, it did not want to "unreasonably restrain the access credit-worthy borrowers had to mortgage finance".



It said: "We will seek the right balance between protection for consumers, sustainability of the market and consumer choice."



The regulator plans to publish a cost analysis of the new rules in the summer before setting out its final package of changes early next year.

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