THIS ARTICLE WAS FIRST PUBLISHED IN JANUARY 2012. THE FINANCIAL SERVICES AUTHORITY HAS SINCE BEEN REPLACED BY THE FINANCIAL CONDUCT AUTHORITY. THE FINAL OUTCOMES FROM THE MORTGAGE MARKET REVIEW ARE CURRENTLY SCHEDULED TO BE IMPLEMENTED IN APRIL 2014.
On 13 December 2011 the Financial Services Authority, who regulate the UK mortgage market, published their last consultation document into proposed changes to the way mortgages are arranged. Although the proposals are not yet set in stone it seems likely most of them will be. They would take effect from 2013.
The key headline proposals would impact on every mortgage applicant to some degree. These include:
Income will have to be verified in every mortgage application – bringing an end to both ‘self-certification’ and to ‘fast-track’ mortgage products.
- The rules for determining disposable income, i.e. what lenders should consider as acceptable income is provided.
- Lenders will have to decide on the ‘stress test’ they wish to apply, to check that mortgage applicants will be able to afford the payments should interest rates rise. This will bring sharply into focus the potential ‘payment shock’ when the present low interest rates start to rise.
- Interest only mortgages will still be permitted, but lenders will have to satisfy themselves that the borrower has a credible strategy to repay the capital at the end of the term. This will cut down the number of borrowers who get to the end of a mortgage term and still owe thousands with no obvious way to pay the mortgage off.
- The vast majority of sales will have to be carried out on an advised basis – all sales where there is human interaction, face to face, phone or e mail, will have to be advised. Only internet and postal ‘execution only’ business for ‘high net worth and professional consumers’ will be permitted. This will impact heavily on some mortgage broker call centres who currently arrange mortgages on a non-advised basis.
- Certain mortgage applicants who pose a higher risk to themselves, such as those consolidating debts, will have to get explicit advice. This will highlight the fact that putting short term unsecured debts onto a long term secured mortgage can be more expensive and puts the home more at risk of repossession if payments are not maintained.
- There will be special transitional rules for borrowers caught by any new changes in rules – the so called ‘mortgage prisoners’ – and both their existing lender or a new lender can apply transitional rules to ensure they are not disadvantaged if they wish to move home or remortgage.
These new ways of assessing mortgage affordability are nothing new, and good lenders and brokers have been applying something similar for some time. However, the proposals, if adopted, will see a change in many areas of the mortgage application process.
If you are looking for mortgage advice, make sure your adviser is asking the questions now that will show if they are ahead of the game – can you afford this mortgage both now and into the future? How will you pay it back? Do you understand the implications of consolidating debts?
My opinion is that the proposals of the mortgage market review by the Financial Services Authority are to be welcomed, bringing sensible and prudent lending back to the markets. This should at least help to avoid a repeat of the credit crunch we have all been party to for the last four years or so, and which has caused the worst mortgage restrictions for a generation.