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Tougher mortgage checks proposed

19 December 2011

Mortgage applicants face more rigorously enforced checks on their ability to meet repayments, under plans announced today by the Financial Services Authority (FSA). The move is intended to tackle “the risky mortgage lending seen in boom times” which relied on “the assumption that house prices would always rise”, said the financial watchdog.

Key features of the proposed regime include:

  • Income will have to be verified in every mortgage application;
  • Lenders do not have to consider in detail what borrowers spend, but cannot ignore unavoidable bills, such as heating and council tax;
  • Interest-only mortgages can still be offered as long as borrowers have a credible plan to repay the capital. But relying on hopes of rising property values is not enough;
  • Lenders will have to consider the impact of increases in interest rates in line with current market expectations;
  • Some applicants, such as those trying to consolidate debts with a mortgage, will have to get advice to ensure they understand the full implications and costs.

Existing borrowers will be unaffected and lenders will have the flexibility to provide new mortgages to some existing customers even where they do not meet the new affordability requirements.

The FSA has significantly amended the proposals following detailed feedback from lenders, consumer groups and other stakeholders. It is now encouraging these all other interested parties to give their opinions on this new, full, set of proposals, as well as on the accompanying cost benefit analysis.

Lord Turner, chairman of the FSA, said: “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."

Following consultation, the FSA Board will make a decision on the final form of rules in summer 2012, but implementation will not be before 2013. The authority is also calling for feedback on developing a specific approach for entrepreneurs who borrow against their home to fund their business.

Click here to access the consultation. Comments are requested by 30 March 2012

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