A million frozen out of mortgage market

Experts fear 'excessive' lending rules will create financial underclass

The slide left the average home in England and Wales costing £164,455
The slide left the average home in England and Wales costing £164,455

More than a million people could find themselves unable to buy a home after Britain's financial watchdog said it planned to ban lenders from offering mortgages to people who cannot prove their income.

Experts criticised what they said was an "over-reaction" from the Financial Services Authority, saying that while there were abuses in the run-up to the credit crunch, the vast majority of such "self-certification" loans were legitimate. Even the FSA said it accepted that the mortgage market worked well for "95 per cent of consumers".

As the borrower does not have to prove his or her income to their lender, self-cert mortgages are usually used by small businessmen and freelancers, whose numbers are set to increase significantly as unemployment continues to rise. Economists say the jobless total will not peak until next spring. Ray Boulger, senior technical manager at mortgage broker John Charcol, said: "This seems excessive. When the recovery gets under way and mortgages become more widely available they will be shutting people out of the market when what they are supposed to do is protect them.

"The FSA says it can't understand why anyone would need a self-certification mortgage. That's a damning indictment of its understanding of the market. Often a small business person will take one out because in the time it takes them to prepare the accounts they need to prove their income they could lose a house."

Mr Boulger estimated that a million or more of the 10 million home loans in Britain were self-certification mortgages. He said that the vast majority of them were perfectly legitimate.

The Council of Mortgage Lenders was more measured, but it expressed similar fears. Director general Michael Coogan said: "There is a risk that the new FSA rules may end up making it more difficult to get a mortgage for those people who used self-cert for perfectly legitimate reasons. We will want to work with the FSA to make sure that the new rules don't have negative spin-off consequences, and end up slowing down market recovery or excluding creditworthy borrowers."

There were also warnings that the FSA's plans could result in an increase in financial exclusion, with banks reverting to the practice of only lending to the "safest" borrowers for fear of the upsetting the watchdog.

Rosali Pretorius, financial markets and regulation partner at City law firm Denton Wilde Sapte said: "The FSA should be careful not to throw out the baby with the bathwater. Not so long ago, there were widespread concerns on financial exclusion. Impose too many rigours on the banks and the 'hard-working families' the politicians are fond to speak of will have no access to lending to get on the housing ladder. Unusual applicants should not be excluded just because the breadwinners are self-employed or cannot easily get conventional insurance on account of medical conditions."

Privately, lenders voiced deep unhappiness about the plans, arguing that they were being criticised by the Government for failing to lend enough to consumers while the FSA was proposing new curbs.

But the watchdog defended its stance. Jon Pain, FSA managing director of supervision, said: "We are not trying to make it impossible for self-employed people to get mortgages. They will just have to prove their incomes." Mr Pain said that nearly "half" the mortgages advanced prior to the advent of the credit crunch were either self-certification or fast-tracked, meaning borrowers were able to obtain loans without providing any evidence that they could afford to pay them back.

"For the vast majority of consumers the mortgage market works well. What we are trying to do is deal with the excesses. There are still 400,000 people in arrears and if we can stop some people going through that, it would be a good thing."

Other measures being considered by the FSA include the possible introduction of a cap on the amount banks lend to people based on multiples of their incomes "in the future".

The watchdog also said it was concerned that large loans were frequently advanced to risky groups such as people with low incomes and/or high debt. It described this as a "toxic mix" and said it would act to prevent it from happening by forcing lenders to ensure borrowers pass "affordability tests".

It proposes making mortgage brokers personally accountable to the FSA while lenders are likely to be banned from imposing charges that allow them to profit when their customers go into arrears.

The FSA said its proposals followed the emergence of banks engaging in what it called "high-risk lending strategies which typically focused on higher risk borrowers; relaxed credit standards; and a mutual assumption by too many borrowers and lenders that the good times could not end".

If they are adopted as they stand in yesterday's discussion paper they will mark a significant departure for the regulator, which has until now fought shy of regulating financial products, preferring to focus on the way they are sold.

The watchdog said consumers were as much at fault as lenders for problems in the market in the run-up to the credit crunch and suggested that they needed protecting from themselves.

"We believe that irresponsible borrowing has been just as much a part of the problem in the mortgage market as irresponsible behaviour by firms. Most consumers, of course, have acted responsibly, but a significant minority have made decisions which were imprudent and which they should have been in a position to recognise as such in advance," it said in its discussion document.

While the industry was unhappy with its proposals, consumer groups were more welcoming.

Which? chief executive Peter Vicary-Smith said: "We're pleased that the FSA is looking to take a more robust approach to regulating the mortgage market although we would like to see tougher measures such as a ban on mortgages over 100 per cent and the naming of lenders that mistreat their customers.

"Mortgage providers are already responsible for assessing affordability, so why is the FSA only getting tough on it now? Many borrowers are suffering the consequences of irresponsible lending."

Currently it is hard to get a mortgage of greater than 70 per cent of a home's value without paying a substantial premium but the market has been liberalising in recent weeks with lenders finally willing to take greater risks.

The new rules: Can you beat them?

*While tighter lending rules may help stop families over-committing themselves, the FSA's proposals could also hit anyone planning to take out a mortgage or remortgage.

A ban on self-certified loans would hit the self-employed and freelance workers, while new affordability tests could make it harder for first-time buyers.

Existing borrowers may also be hit when they come to remortgage as more cautious lenders may move them into a higher risk bracket.

The proposals will mean more paperwork for self-employed people. They will need to provide three years' worth of accounts, or a letter from their accountant confirming their income.

Anyone with less than three years' self-employment may still be able to get a mortgage, if they can prove affordability. Many lenders already use affordability rather than income levels as a way to decide whether to agree a loan. They generally want to examine bank statements – say six months' worth – to see how much money you have coming in and what your outgoings are.

If the FSA's proposals are adopted, lenders are likely to ask for even more details of your spending.

The net result will be that if you can't prove you can afford a mortgage, you won't get one. On top of that existing mortgage-holders who may have inflated their income to get their loan could have problems if they need to remortgage. Simon Read, Personal Finance Editor

Case study 'It will be much tougher for me'

*Georgina Burnett, 30, is a self- employed television presenter and life coach. She is getting married next September, and currently rents a house in Sevenoaks, Kent with her fiancée.

I became a headhunter after leaving university but I've been freelancing for about six years now. My fiancée and I moved in together a year ago, and chose to live outside London – even though both of us work there – because you get so much more for your money. We were always looking at properties.

However, the new rules make me think that I should hold off and save up for a bigger deposit.

People who go self-employed or freelance will find proving their income especially difficult, because – particularly when you first set out – your earnings are so uncertain.

Even people who are well established sometimes earn double in one month what they will in another. So I suppose the new regulations will make all self-employed people think twice about getting a mortgage. It is also a strange time to be self-employed. I have noticed that whereas before I'd be booked up well in advance, it is now all very last minute. At the beginning of the month you're looking at the number of days you've got booked in, unsure about how much you'll be earning. The last thing you want is a huge mortgage hanging over your head.

Although the other rules seem quite intrusive on the surface – the lenders will be able to look at exactly how much you're earning, and what you spend on your lifestyle – I suppose their argument is that if you've got nothing to hide then you've got nothing to worry about. If I was lending someone that much money, I'd want to know it was going to be paid back.

I kind of agree with the general idea behind the new rules, because things do have to change. I personally would never want to borrow more than I could afford to pay – I wouldn't want that kind of pressure on me. But this isn't going to help me get on to the property ladder.

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