Changes put forward by the Financial Services Authority will introduce some of most significant changes to the mortgage market this country has seen in recent times.
The FSA new rules for banks to follow on approving mortgages are designed to make sure customers are not able to borrow more than they can afford. They include a ban on self-certification mortgages, new rules for those seeking to remortgage, stricter rules on interest-only mortgages, improved affordability checks, and a change in the rules on how advice is given by mortgage brokers.
These changes have come about prevent another boom in mortgage lending and in house prices. This is what happened in the middle of the last decade and why some right wing commentators say we are now facing one of the worst financial disasters ever witnessed.
So how does the affordability test, as proposed, work?
A lender will consider how much you spend on essential household expenditure such as heating and council tax plus basic living costs and other debt commitments. If these changes are implemented a lender will no longer have to consider how much you spend on discretionary spending such as on leisure activities and holidays as it will expect a borrower to change spending habits if the borrower wishes to succeed with the loan application.
Lenders will also apply a “stress test” on your finances so as to assess your ability to afford your mortgage repayments if interest rates rise in the future.
What about interest only loans?
Borrowers will only receive an interest-only mortgage if it can be proved there is a robust strategy to repay the capital, such as from the sale of a second home or have an Isa (Individual Savings Account) or from regular bonuses.
Replacing existing mortgages will also prove difficult under these new rules though the FSA have introduced “transitional arrangements” to help existing creditworthy borrowers that might not be able to move home or refinance as a result. Lenders will be allowed to waive the new affordability rules for existing borrowers if the borrower has met repayments for at least the last 12 months and have not fallen into arrears. Existing borrowers who need to borrow more will however be subject to the new affordability rules.
These new rules are unlikely to change the current attitude of borrowers and in the short term are likely to keep property prices stagnant. Whether this will assist first time buyers remains to be seen, though our view is that they will only serve to make it more difficult for those looking to get onto the property ladder and force more people into looking to the rental market. These rules could very well begin to turn our property market into those markets commonly found on the continent where home ownership is not a priority and indeed a goal of those looking for a home.
The rules will create a more stable housing market but one which will be seeing a reduced number of transactions and one where only those who have financial stability and a track record of proving it will be able to become home owners. Whether this is good for the country as a whole and will lead to a more stable and balanced society will remain to be seen.
As conveyancers, there will be fewer transactions around and as those borrowing will face higher lender fees and perhaps spend more money to prove their track record and credit worthiness, there may be a temptation to make economies elsewhere, and perhaps look to find the conveyancer advertising the lowest price.
At MJP we understand this, and this is why we offer a competitive price for our moving service, but with the commitment to ensure we also provide a personalised service and one in which we take pride. We are able to offer a quality service at a discounted price because we operate a unique case management system and have quality checks built into every stage of our process. All out clients can access the system and receive regular updates straight to their phones.
Each client is also assigned his or her very own case handler who will oversee the transaction throughout its course.
Morgan Jones and Pett are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877000 or via email at email@example.com
"David Pett and his team have been excellent - regular updates and speedy responses to queries. Something that has been problematic with other solicitors in the past"
Louise Stone - December 2011