Tougher lending
TOUGHENED mortgage lending rules to make sure borrowers can only take out deals they can afford and prevent any return to irresponsible lending have been outlined by the financial services regulator.
The shake-up, which comes into force in April 2014, is the result of a long-running review by the Financial Services Authority (FSA), aiming to put "common-sense" at the heart of the market.
The FSA also announced a new rule stating that lenders must not take advantage of a borrower who cannot get a mortgage elsewhere by treating them less favourably than other similar customers, for example by offering them a worse interest rate or terms.
It said this would help protect people who were already stuck with their current lenders, as well as those who may become trapped when the new rules came in.
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From 2014, lenders will need to consider a borrower's income and outgoings and interest-only mortgages will only be offered to people with a firm repayment plan, rather than relying on hopes that house prices will rise.
They will also have to factor in the impact that future interest rate increases could have on repayment costs. The new rules will affect the nine million UK households which have a mortgage as well as many people in the rental sector who are already struggling to buy a home.
The FSA insisted its rules would not stop lenders being able to offer low-deposit mortgages to first-time buyers and there would be no upper age limits imposed.
Martin Wheatley, managing director of the FSA said: "We recognise that many lenders are now using a far more sensible set of lending criteria than before, but it is important that these common sense principles are hard-wired into the system to protect borrowers.
''We want borrowers to feel confident that poor practices of the past, which led to hardship and anxiety, are not repeated."
The Council of Mortgage Lenders (CML) previously raised concerns that many more existing borrowers could find themselves trapped under the new rules.
The FSA has now altered its plans so that lenders would be able to "switch off" the requirements for existing borrowers who wanted to get a new mortgage for the same amount or less, provided they had a good repayment history.
The clampdown follows a period during the property boom when would-be buyers increasingly stretched their finances to get on the ladder.
Last year, a house was worth around five times the buyer's income on average, compared with 3.7 times a decade ago.
Shelter found last year that 42 per cent of borrowers sometimes found it hard to make mortgage payments, with 14 per cent struggling constantly.
The regulator estimated that as a result of lenders already tightening their borrowing criteria, up to 45 per cent of borrowers who had taken out a deal since 2005 could be mortgage prisoners.
Roughly half of them were thought to be trapped due to their credit problems and the other half because interest-only and low-deposit deals had become more restricted.
The FSA has previously warned that a "ticking time bomb" has been created over the past 20 years, with an estimated 1.5 million interest-only loans worth around £120 billion due for repayment in the next decade.
Such deals allow borrowers to pay off the capital only when the mortgage term ends, but lenders have cut back on them amid concerns people cannot afford to pay them back.
The FSA is looking at how many interest-only borrowers will be unable to repay their loans and plans to publish its findings next spring.
The CML welcomed the FSA's changes to rules which could have been "unduly restrictive".
Paul Smee, CML director general, said: "The regulatory changes have already been widely anticipated and are unlikely to create any significant additional or unexpected impacts."
Comments
by Neathboy234
Thursday, November 01 2012, 9:09PM
“The weekly average wage for full-time adults in Wales were £519/week(2011, i can't find 2012.
That equates to a single person being able to borrow just over 80K, with a 20% deposit that wouldnt buy you an ex council-house. You don't get much for your money these day, another big drop in house prices will soon come about. No first time buyers will soon have an effect on supply and demand”
by weslangdon
Thursday, November 01 2012, 8:42PM
“Applegarth had Northern Rock lending 5x income, was borrowing short term on the money markets but lending long term, as stupid a lending policy as is imaginable. RBS overreached themselves with the purchase of ABN Amro just as the crisis was breaking. Fairly specific faults that lead to these banks collapse whereas HBOS collapsed due to excessive risk taking and systematic mortgage fraud. Three different routes to bankruptcy but what was and still is apparant is that these "masters of the universe" were not being supervised by the FSA nor have they paid for their criminality, on the contrary its the Great British Public that have been saddled with these clowns debts.”
by Gwyddno
Thursday, November 01 2012, 8:00PM
“GorsseinonJoe
Northern Rock went bankrupt when they could no longer borrow money overnight - The Credit Crunch.
The new rules issued by the, soon to be defunct, Financial Services Authority (FSA) are in respect of those seeking new mortages and existing mortgages.
What brought about the collapse of Northern Rock is different.
For more info, try the FSA website link: http://tinyurl.com/9hv96fm”
by Neathboy234
Thursday, November 01 2012, 7:05PM
“weslangdon inflation does play a big part in buying a house. I had my first mortgage back in the mid 80's. I bought a house for 57K. At the time i struggled to pay for it, especially when my wife give up work to look after the kids. At the end of the day it paid off as house prices took off in the late 80's.”
by Neathboy234
Thursday, November 01 2012, 7:02PM
“GorsseinonJoe Does this apply to the British government as well. Those clowns we have in London have put us 1 trillion in debt, sure they are trying to reduce the £125 billion we borrow this year. But there is very little talk of ever paying anything back. If the money men listened to you we(The UK) would never be able to borrow another penny. Fortunately for us they are not listen to U, lol lol.”
by weslangdon
Thursday, November 01 2012, 6:59PM
“It's not quite as simple as that as if you factor in inflation a mortgage cost will fall as time passes, couple that with an expectation of modest wage rises and mortgages become more affordable as the term progresses. However the years up to 2008 were of utter insanity where everyone [nearly] bought into the property bubble but what has made this so catastrophic is that it was throughout the Western world whereas past bubbles have been localised. However given a rising population, overcrowding, and unmet need will again push prices upwards”
by GorsseinonJoe
Thursday, November 01 2012, 6:30PM
“Is this new thinking? To actually check that a borrower can repay a debt? This is what happened when I took out a mortgage 35 years ago. Would anyone in this forum lend money to someone who, they felt, could not repay?
Would you lend someone £125 when you knew they were only good for £100? This is one of the reasons Northern Rock went belly up with the nonsensical 125% mortgages, do we really have such short memories that we think that loans should be given without the checks that would ensure repayment? This is a safeguard for both lender and borrower.
Look at the debt the country has amassed on the borrow now pay later politics we had and the amount of private debt on Credit Cards, Loans etc. Don't lend unless you know you can get your money back, don't borrow unless you can pay it back, simples!”
by Neathboy234
Thursday, November 01 2012, 5:28PM
“Good this will lead to further drops in house prices which will be good for all in the end. Effectively this will freeze first time buyers out of the market in the South East and London, perhaps we should be looking for ways to encourage them to move to Wales, and before anyone says anything YES there are vacancies in our job centers”
by Dan01
Thursday, November 01 2012, 5:27PM
“The main factor is ability to repay. This is where banks became careless in their scramble to get business ahead of their competitors, ending up lending on scant or dubious, even no evidence of customer's ability to meet the commitment long term. Nothing wrong with 100% mortgages or four times income provided the applicant is properly assessed. Trouble is the banks relied on computers (no judgement?) and credit scoring than the basics. Bankers and customers must meet face to face, something that doesn't happen any longer.”
by weslangdon
Thursday, November 01 2012, 3:21PM
“Agreed, some of the lending practices pre 2008 were comically stupid...but we do need more houses and if the private sector can't and won't provide them then the public sector needs to step in and build council houses.”