Earlier this week the Financial Services Authority proposed new rules to govern mortgage lending in an attempt to put more onus on lenders to ensure that mortgages are affordable. If you are thinking of applying for a home loan, this is what those reforms will mean to you:
Mortgages may be more difficult to get in the future because the lender will need to make sure that you (the borrower) can afford the loan. One of the major changes will be the outlawing of self-certification. Put simply, you won’t be able to simply tell the lender what your income is; instead he will calculate how much disposable income you have left after other outgoings and assess if this is enough to meet the mortgage repayments. In effect, this puts an end to ‘fast-track’ applications.
There will also be a crack down on ‘toxic combinations.‘ A toxic combination is when several factors in the borrower’s profile added together make it obvious that there will be some difficulty in repaying the loan. For instance, lending a high multiple of income to somebody with a poor credit history would be outlawed.
Because lenders will be picking up the pieces when loans go wrong, they will need to ensure themselves against unpaid loans. This could mean a rise in the cost of mortgages.
There is the possibility that courts will not be so quick to grant repossession to lenders. This is based on the assumption that the onus is on the lender to ensure that these situations do not occur.
Buy-to-Let and Second Charge Lending
Buy-to-let and second charge lending is an area that the FSA want to regulate, however, to do so they would need government approval.
These changes to home loans are by no means definite.
These reforms to the mortgage market are only at the consultation stage. This means that they will not be taking effect immediately and that, following the consultations, the rules may change. Discussion and consultation is open until January 30th, 2010 and the FSA are actively seeking views from consumer groups and the mortgage industry. The feedback statement will be published in March.
What does the mortgage industry think about the reforms?