New Rules Make Mortgage Lending Tougher

A report on published on Monday may make it tougher to get mortgages in future, in order to stop "risky lending".

The Financial Services Authority (FSA) announced its plans to prevent a return of the "risky mortgage lending seen in boom times", and to prevent the recurrence of what it called "irresponsible lending".

The Mortgage Market Review found that banks had been lending on the assumption that house prices would always rise leading to many of borrowers now struggling to repay their mortgage and in danger of losing their home.

According to the FSA, the proposals will see mortgage lenders "properly checking" each applicant’s realistic ability to repay their mortgage.

Chairman of the FSA, 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 report also outlined three principles of good mortgage underwriting that it would be issuing to lenders: Mortgages and loans should not rely on uncertain future house price rises; An affordability assessment should allow for the possibility that interest rates might rise in future; and that interest-only mortgages should be assessed on a repayment basis unless there is a believable strategy for repaying out of capital resources.

Lord Turner added: “The three key proposals are, we believe, the most effective way to tackle the problem of risky lending. But it is essential that we understand what their impact would be – how many consumers would be protected from the distress of arrears and repossessions, and, how many consumers who could have afforded a mortgage might have to take out a smaller mortgage or to delay their purchase."

(DW)