New mortgage rules: commonsense prevails

For once common sense has prevailed. The new proposals for mortgage regulation, revealed by the Financial Services Authority (FSA) today, take into account criticisms made by practitioners to earlier proposals.

Climbing down

The FSA is, very sensibly, keen to prevent a return to some of the more risky lending practices of the boom years. But it has modified its proposals and is no longer in danger of throwing out the baby with the bathwater.

Clearly there has been some irresponsible lending in the past – most notably around ‘self-cert’ mortgages, now banned. But the FSA has taken on board that it is crucial the new rules do not become so onerous that first time buyers and others on limited incomes are effectively excluded from homeownership.

Importantly, the FSA  has modified its approach to interest-only loans and is not proposing an outright ban. In the past many first time buyers were offered interest-only loans to keep monthly payments to a minimum. This is a risky strategy and removes any leeway for reducing monthly outgoings if the borrower suffers a financial setback. Most of these borrowers relied on rising house prices to enable them to move house and put down a deposit on a new property. This can no longer be relied upon – if it ever could.

Homebuyers trapped

Most importantly, however, lenders will have the flexibility to provide new mortgages to existing customers even when they do not meet the new tough affordability requirements. These ‘mortgage prisoners’ were previously in danger of being trapped in their existing property.

‘We will allow lenders to waive the affordability rules when entering a new mortgage contract - providing the borrower has a good repayment history. These arrangements do not compel the lender to lend, ultimately that is a commercial decision for the firm,’ says the report.

This will be a relief to millions of homebuyers who no longer qualify for a new mortgage. Those  who took out ‘self-cert’ mortgages where they did not have to prove their income, for example, and others who have seen a drop in their income since they took out the original loan – often when the woman gives up work to have a baby. 

Advice

The FSA has also listened to practitioners about the need for discretion in lending for non-standard cases. Advice will be a key feature of the new regime, and all sales which involve spoken or other interactive dialogue with the consumer must be advised.

Knowledgeable consumers such as wealthy individuals and professionals can opt-out of receiving advice and purchase on an execution-only basis.

But vulnerable consumers – those considering equity release, sale and rent back, right to buy and borrowers who are consolidating debt – will not be allowed to opt-out of advice. However, with the exception of sale and rent back consumers, they can reject the advice and proceed to purchase on execution-only basis. Some applicants, such as those trying to consolidate debts with a mortgage, must be given advice to ensure they understand the full implications and costs.

Key features of the proposed future regime also include a requirement for income to be verified in every mortgage application. The requirement for intermediaries to assess affordability has been removed, however, and advisers will only be required to determine whether the consumer meets the lender’s expected eligibility criteria. 

What the critics said

Welcoming the FSA proposals, Robert Sinclair, director of the Association of Mortgage Intermediaries said, ‘making mortgage advice a requirement for all interactive sales unless the customer rejects the offer of advice will provide significant benefits for consumers. Buying a house is a substantial financial undertaking, and we have long argued that providing consumers with expert advice is a process that cannot be left to chance.’