Mortgage reform – what it means for you

Will it be harder to get a mortgage in future?

No – not if you can prove you have sufficient income. Under the Financial Services Authority’s proposals, all mortgage applications will be subject to an “affordability test”, to ensure that borrowers have enough disposable income to meet their monthly repayments. Lenders will be responsible for calculating an applicant’s ability to pay – although most do this already when you apply for a mortgage. Only self-employed people with less than two years of accounts, or people with irregular income patterns, will find it harder to get a loan.

How will affordability tests work?

Affordability tests are expected to work in the same way that they do for most existing mortgages and credit deals. Your application will have to state your income and all your regular outgoings – including tax, bills, household expenditure and other debt repayments, such as credit card payments. Your prospective lender will use these figures to calculate your “free disposable income”, and ensure it is enough to cover your mortgage payments – possibly on a capital repayment, rather than interest-only basis. To allow for future interest-rate rises, lenders may be made to carry out a “stress test”, to work out whether your repayments could still be met if the standard variable rate rose by 2 percentage points. Future pay rises, or future reductions in household spending, will not be taken into account.

I need a 90 per cent mortgage – can I still get one?

Yes – if you can prove you have the income to repay it. The FSA is not proposing to ban high loan-to-value (LTV) mortgages – not even loans that provide 100 per cent or more of a property’s value. Nor is the FSA proposing a limit on the multiple of your salary that a mortgage lender can lend. So mortgages of 90 per cent LTV or higher, or four times salary, can still be offered. However, mortgages that contain too many of these “toxic” risk factors – such as high LTV, and a high income multiple, for a borrower with a poor credit record – will be banned.

What if I’m self-employed?

You will now have to prove your income, by providing at least two years of accounts or the self-assessment tax calculation form SA302. “Self-certification” mortgages, which allowed borrowers to state their income without any independent verification, will be banned under the FSA proposals. Mortgage brokers say that if you are self-employed without sufficient proof of income, you will have no option but to delay applying for a conventional mortgage until you can show a history of trading at a profit. If you are self-employed and currently have a self-certification mortgage on a fixed or tracker rate, you will either have to remortgage to a conventional loan, or move on to your current lender’s standard variable rate, when your current deal runs out. This may not mean higher monthly repayments – as standard variable rates remain low – but rates are expected to rise in future.

Will I still be able to get a buy-to-let mortgage?

Yes – but the FSA is proposing that all buy-to-let mortgages come under its regulation. This is likely to mean that affordability tests will be applied to ensure that the rental income is sufficient to cover the mortgage payments – although almost all lenders already do this as a matter of course.

Will I still have to pay arrears charges?

Yes – but not if you are already making repayments of arrears. In January 2010, the FSA plans to publish specific proposals to toughen the rules on arrears handling, including a ban on administration charges if you are adhering to an arrangement to repay your arrears, and a ban on applying early redemption charges to your arrears fees.

When will these changes take place?

The FSA will be discussing these proposals with consumer groups and mortgage providers between now and January 30, 2010. A feedback statement will be published in March 2010, with the new rules phased in after that. But mortgage brokers do not expect the affordability rules to apply until the fourth quarter of 2010, at the earliest.

Will mortgages become more expensive?

Most lenders already carry out affordability tests, so there should be no reason for higher administration fees for conventional mortgages. However, the self-employed may see costs rise to cover the additional paperwork involved in verifying their income.

Will house prices be affected?

Estate agents fear that the new rules could slow down house sales, if cautious lenders are given more reasons to refuse mortgage applications. Research from one property website suggests that the average home now takes an average of 6.9 months to sell, and this period would increase under tighter lending rules. But property investment company Assetz believes prices will become less prone to boom and bust. It says: “Regulation of lenders to ensure mortgage affordability, the removal of simple self-certification mortgages without adequate proof of income and outgoings, and regulation of buy to let mortgages will all improve the stability of the UK housing market.”

Affordability measures are already part of the mortgage in system in France, where prices have been less adversely affected since the credit crunch.