More on Mortages


Earlier today, the Financial Services Authority (FSA) announced plans for a new set of mortgage lending rules to prevent “a return of the risky mortgage lending seen in boom times”.

The new set of rules should prevent homeowners from borrowing more than they can afford and are likely to come in full effect by 2013.

FSA’s latest mortgage market review paper (pdf, 2.4 MB) outlines the need for all prospective borrowers to get the right information and advice. It also aims to ensure that mortgage lenders will be assessing the affordability of loans more effectively and be thoroughly checking each applicant’s ability to keep up with their mortgage repayments.

Existing borrowers who might have been prevented from remortgaging will also be allowed some degree of flexibility to manage their lending terms under the new mortgage lending rules.

According to the three key proposals of “good mortgage underwriting”, as explained by FSA, borrowers should avoid assumptions on future house prices and lenders should assess long-term affordability. The three key proposals specifically state that:

Mortgages and loans should only be advanced when the borrower can afford repayments without relying on future house price rises.

Every affordability assessment should take into account any future changes in interest rates with a minimum five-year outlook and borrowers should not enter contracts based on the assumption that the initial interest rates will not change later on.

Interest-only mortgages should be assessed no differently than repayment mortgages unless the borrower has a viable option to pay off the loan that does not rely on the assumption that house prices will rise.

Chairman of the FSA, Lord Turner commented on the proposed rules:

“We believe that these are common sense proposals which serve the interests of both lenders and borrowers. While the excesses of the pre-crisis period have largely disappeared from the current market, it is important to ensure that better practice endures in future when memories of the crisis recede and the dangers of poor practice return.”

“The three key proposals are, we believe, the most effective way to tackle the problem of risky lending. But it is essential that we understand what their impact would be – how many consumers would be protected from the distress of arrears and repossessions, and, how many consumers who could have afforded a mortgage might have to take out a smaller mortgage or to delay their purchase.”

“The estimates are inherently uncertain, but they suggest that the new rules would have only a marginal effect in current market conditions – and particularly so for first time buyers – but would act as a significant constraint if market practice were in danger of returning to the 2005 to 2007 pattern. That pattern of effect would be a highly desirable one. We are however particularly keen that lenders provide their detailed assessment of the likely impact of these proposed rules. Then the FSA will be able to make appropriate final decisions.”

“The proposals published today reflect the ideas and input of many stakeholders, including consumer groups and lenders. We believe these proposals will hardwire common sense standards into mortgage lending and guard against the risky lending practices of the past – leaving most borrowers unaffected, but better protected.”

The FSA Board will make a decision on the final form of the new mortgage lending rules in summer 2017.