New mortgage lending rules set out by FSA 2013

New rules to stop a resurgence in risky mortgage lending are likely to be imposed in 2013 by the Financial Services Authority (FSA). The regulator's revised proposals still intend to bring in "common sense" standards that will stop home buyers borrowing more than they can afford. Lenders are being told they must assess the affordability of loans better. But some flexibility is being allowed for existing customers who might have been prevented from remortgaging. Lord Turner, chairman of the FSA, said: "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 regulator wants to stop any possibility of a return to the early years of the past decade, in which some lenders handed out mortgages with only cursory checks on borrowers' real ability to repay. The most notorious examples were the "Together" mortgages offered by the Northern Rock bank, which granted loans worth 125% of the value of homes. In some other extreme cases, lenders offered mortgages worth seven times a borrower's income, or allowed them to exaggerate their real income, especially in the case of "self-certified" mortgages.

"The proposals will see prospective borrowers - whether they are first-time buyers, right-to-buy tenants or home movers - get the right information and advice, at the right time, and ensure mortgage lenders will be properly checking each applicant's realistic ability to repay their mortgage," the FSA said.
Specifically, when lenders assess a mortgage application, they will have to:
  • assume interest rates may rise from their current low levels.
  • not let borrowers rely on the possibility of rising house prices to claim they can eventually repay.
  • assess interest-only mortgages as repayment ones, unless there is a "believable" source of money to pay off the loan.
Although lenders will still have to check income details in each mortgage application, the FSA is no longer proposing that a borrower undergoes a detailed check of how they spend their money, but only be given a broad assessment of their "committed and essential household expenditure" instead.
Under the proposed new rules, interest-only mortgages can still be offered if there is a "credible" plan to repay the loan, which does not involve a borrower assuming he or she can eventually cash in on the rising value of their home.

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