Following a two-year consultation, the Financial Services Authority has published what it terms “common sense proposals” aimed at preventing a return to risky lending. FT Money looks at what the new rules will mean for you.
Will it be harder to get a mortgage in the future?
Not if you can prove you have sufficient income. Under the Financial Services Authority’s proposals, lenders will have to apply tougher affordability tests to make sure borrowers can meet monthly repayments. All mortgage applicants will have to prove their income, effectively banning “self-certification” mortgages where borrowers did not have to verify their income. It means that newly self-employed borrowers will find it harder to get a loan, as well as borrowers seeking interest-only mortgages.
How will the affordability tests work?
A bank will consider how much a borrower spends each month on essential household expenditure – such as heating and council tax – basic living costs and other debt commitments when deciding how much it will lend to a borrower. Most banks have already started to do this since the economic downturn. One important change in the latest proposals is that banks will not have to consider how much a borrower typically spends on discretionary spending such as going out and holidays when assessing affordability – as it realises that this rule did not take account a borrower’s ability to change their spending habits once they have taken on a mortgage.
Banks will also have to “stress test” every mortgage application to make sure a borrower can still afford their mortgage if interest rates rise in the future. They will base this on what current market expectations believe interest rates will rise over the next five years, set at a minimum of 1 per cent to take into account unanticipated interest rate rises.
Can I still get an interest-only mortgage?
Yes – but only if you can provide credible evidence that you have a strategy to repay the capital. This can be in the form of a repayment vehicle, such as the sale of a second home or savings in an Individual Savings Account (Isa), or from regular payments of income such as bonuses. Relying on hopes of rising property values will not be allowed.
I’m self-employed, can I still get a loan?
You can if you can prove your income stream to the lender. Self-employed borrowers can still get a mortgage if they can provide at least two years of accounts. Newly self-employed borrowers will have to wait to get a mortgage until they can prove their earnings.
I’ve got a mortgage but I’m worried I won’t meet the new rules when I remortgage, what can I do?
The FSA has introduced new “transitional arrangements” to help existing creditworthy borrowers that might not be able to move home or refinance as a result of these new rules. You are not alone – the Council of Mortgage Lenders estimates there are about 2.2m current homeowners that would not have got their mortgage if the proposals were introduced in their original form.
Lenders will only be allowed to waive the new affordability rules for existing borrowers that have met repayments for at least the last 12 months and have not fallen into arrears. The transitional arrangements also only apply to borrowers who are not seeking additional borrowing and the monthly payments have to be the same or lower than the existing mortgage payments. These borrowers will be able to apply for a new loan through either their existing mortgage lender or a new bank.
Existing borrowers who need to borrow more will be subject to the new affordability rules. The only exception to this rule will be where the property is at risk if repairs or maintenance work are not carried out. In this example, the borrower’s existing lender will be able to advance additional funds to repair the property. However, these transitional rules do not “compel” a bank to lend to an existing borrower. The FSA states that it ultimately remains a commercial decision for the lender.
I’m a first-time buyer, how will I be affected?
The new rules shouldn’t pose a problem for you as long as you can demonstrate that you can afford the loan. 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.
When will these changes take place?
The FSA will discuss these latest proposals with consumer and industry groups until March 30 2012. It will then make a decision on the final form of the rules in the summer, but implementation is not expected to occur before 2013.
I’m already struggling to get a mortgage, why do we need more rules?
Most lenders have voluntarily introduced better lending practices as a result of the credit crisis and in response to the FSA’s original proposals, which were published as far back as October 2009. However, the FSA said it remains important to make sure there are rules in place to deter any return to the riskier lending practices that occurred at the peak of the housing boom.
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