Q&A: Mortgage lending rules
- 19 December 2011
- From the section Business
The chief City regulator, the Financial Services Authority (FSA), has moved a step closer towards tighter regulation of mortgage lending.
It wants new rules to be in place to prevent a return of the reckless lending seen in the middle of the last decade.
This will involve much closer scrutiny of a borrower's ability to repay.
Lenders will have to assume in their calculations that interest rates are higher than they are now when decide how much to lend.
The FSA says: "We are concerned that, as money returns to the market, firms will come under increasing pressure to consider riskier lending and will focus more on market share than maintaining lending standards.
"We need to learn the lessons of the past and act to stop poor lending practices re-emerging in the future," the FSA adds.
Who will all this affect?
At the moment, very few people. Strict mortgage rationing, due to a lack of funds, has been in force since 2008 anyway. So home sales have been roughly halved since then. The slightest blemish on a credit score can see an application for a mortgage being turned down. So, the FSA estimates that just 2.5% of current new borrowers would be affected by the more stringent lending rules it is proposing.
So what is this all about then?
This is all about stopping a new boom in mortgage lending, and house prices, in the future if lenders start lending too much money to home buyers who cannot really afford to repay their loans. That is what happened in the middle years of the last decade. Were it not for the extraordinarily low level of interest rates we have been experiencing, the FSA fears that tens, or even hundreds, of thousands more borrowers would now be in arrears and facing repossession.
Even if the boom conditions seen a few years ago returned, the new approach laid down by the FSA would, on its estimate, restrict lending to about 11% of prospective borrowers.
Sounds like not much will change for most people?
Not quite. Firstly, the widespread use of so-called self-certified mortgages (known to some as liars' mortgages) are now ruled out. They accounted for a very high proportion of new lending a few years ago. People will no longer be able to claim - with no evidence - that their income is big enough to justify a mortgage loan when in reality it is not.
For other applicants, even if lenders find they have more money to lend, they will have to scrutinise the finances of their borrowers much more thoroughly, to show they really can afford to re-pay. And lenders will have to assume that interest rates are noticeably higher than they are today.
Will my mortgage deal be renewed?
If you took out a mortgage a few years ago on rather optimistic assumptions, your lenders will not be forced to dump you if, as a brand new borrower, you might not pass the new lending criteria.
Whether you get the same deal is another matter though. If the value of your home has fallen in the meantime, any new mortgage may be much more expensive than it was before.
Will my interest-only mortgage be affected?
Yes, if you want to renew it in its current form. A new part of the FSA's continuing consultation proposes telling lenders to assess the affordability of interest-only loans as if the borrower were taking out a more expensive repayment mortgage. So in the future, if you have an interest-only loan, and want to re-new it, you may have to show that your finances are sufficiently robust, or that you have other "credible" sources of cash to pay off the mortgage in due course.
I would like to buy my first home, but cannot obtain a mortgage. Will this help me?
In the long run yes, because it may help suppress artificial house price booms that lock out first-time buyers. The FSA puts the matter very clearly in its consultation document:
"Easy mortgage credit availability is not necessarily a force for good for groups such as first-time buyers. The easy supply of credit was a factor which, by generating significant house price appreciation, contributed to the declining role of first-time buyers within the market, squeezed by affordability problems."