Tough new mortgage restrictions to stop borrowers falling in to arrears have been proposed by the UK's Financial Services Authority (FSA) after months of behind-closed-doors negotiation with lenders.
Out go self-certification and interest-only home loans for most mortgage borrowers.
In come strict affordability tests to combat payment difficulties and mortgage fraud for borrowers – with lenders having to prove borrowers could afford their repayments before taking any action to seek arrears or repossession.
The FSA claims the mortgage market review is aimed at preventing a return to risky boom time lending based on the assumption that house prices would continue to rise to repay loans.
The review applies to all residential mortgages and remortgages but excludes buy to let landlords, who will still have access to interest-only deals, providing lenders continue to offer them.
The FSA is seeking feedback on new mortgage rules for entrepreneurs who borrow against their homes as security for business spending.
The FSA proposes three core mortgage lending principles:
Lenders should only agree mortgages or loans with a reasonable expectation that the
customer can repay without relying on uncertain future house price rises. Banks and building societies must verify income for every mortgage applicant.
Lenders should assess the borrowers ability to repay a loan on the basis interest rates might rise
Interest-only mortgages can only be agreed if the borrower can prove a strategy for repaying the loan from other resources and that the plans do not rely on future house price rises.
FSA chairman Lord Turner said: “We believe that these are common sense proposals which serve the interests of both lenders and borrowers. While the excesses of the pre-crisis period have largely disappeared from the current market, it is important to ensure that better practice endures in future when memories of the crisis recede and the dangers of poor practice return.
“The three key proposals are, we believe, the most effective way to tackle the problem of risky lending.
“The proposals reflect the ideas and input of many stakeholders, including consumer groups and lenders. We believe these proposals will hardwire common sense standards into mortgage lending and guard against the risky lending practices of the past – leaving most borrowers unaffected, but better protected.”
Consultation on the proposals is open until March 30, 2012.
Mark Alexander, founder of Property118.com welcomes the initiative and says “the countries which have fared best since the beginning of the credit crunch are not those which could be described as a Nation of Homeowners, Germany is a good example. Landlords and mortgage companies need to be far more diligent in making sure that people can afford to stay in the homes they choose to live in.”
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