Proposed reform of mortgages
The Financial Services Authority has published its proposed reform of mortgages, following a two year consultation. The FSA says its “common sense proposals” are aimed at preventing a return to risky lending.
Most lenders have already introduced better lending practices as a result of the credit crisis. However, the FSA says it remains important to make sure there are rules in place to deter any return to the riskier lending practices. The FSA will discuss these proposals with consumer and industry groups until March 30 2012, a decision on the final form of the rules will take place in the summer. Implementation is not expected to occur before 2013.
Providing a borrower can prove they have sufficient income, mortgages will be no harder to achieve in the future. Under FSA proposals, lenders will have to apply tougher affordability tests to make sure borrowers can meet monthly repayments. Mortgage applicants will have to prove their income which in effect will ban “self-certification” mortgages.
When considering a mortgage application, the proposed affordability test will require banks to consider how much a borrower spends each month on essential household expenditure. This expenditure includes heating and council tax, along with basic living costs and other debt commitments.
Banks will have to “stress test” all mortgage applications to make sure borrowers can afford their mortgage if interest rates rise in the future. The FSA has not imposed a ban on high loan-to-value (LTV) mortgages – not even loans that provide 100 per cent or more of a property’s value. The new rules should not pose a problem for borrowers as long as they can prove they can afford the loan.
