New rules proposed by the Financial Services Authority threaten to exclude even more aspiring owners
Paula Hawkins


Conditions for buyers in need of a home loan have rarely been bleaker — but new rules on mortgages threaten to exclude even more aspiring owners.

TimesOnline-Regulations proposed by the Financial Services Authority (FSA) this week, as part of a mortage review, aim to strengthen the market. They include stricter affordability tests for borrowers, an end to self-certification loans and a ban on “toxic combination” loans, such as a mortgage offering a high loan-to-income ratio to someone with a poor credit record. But industry brokers say the plans could make borrowing more expensive for all and almost impossible for a significant minority.

“The FSA says the plans are ‘designed to tackle the problems identified while maintaining a vibrant and sustainable market’. But this mortgage market is not vibrant by any standards,” Melanie Bien, director of the mortgage broker Savills Private Finance, said. “Not only that, but regulation costs, and this cost will be passed on to the consumer in the form of more expensive mortgages.”

Of particular concern is the decision to ban self-certification loans. Ray Boulger, of Charcol, another broker, said: “The full-frontal attack on self-cert mortgages seems based on a major misunderstanding by the FSA.”

Boulger said that the FSA was treating all “income non-verified loans” as self-certification deals when only a small proportion of these are; most are simply fast-tracked. “This is the process where on a mainstream mortgage, the lender exercises their right not to ask for paper proofs because they determine that the mortgage is low-risk.”

However, the proposals will not be implemented for some time — and may not be introduced at all. “This is a discussion document,” Boulger said. “If the responses to it are sufficiently robust, then the FSA will have to take another look at the issues. I think most brokers and lenders will say that the FSA has gone too far.” Interested parties have until the end of January to respond to the proposals. For many, the process of getting a mortgage will remain the same, although you may have to give a more detailed breakdown of your financial situation on an application, so the process could take longer. The FSA has said that lenders need to “calculate the free disposable income a consumer has to pay for the mortgage” — this could include not just income after tax, but all debt repayments, utility bills, the cost of eating out, alcohol and cigarettes. Lenders would also be encouraged to “stress test” an applicant’s ability to pay, by assessing how the borrower would cope if interest rates were to rise.

“To check this accurately would be very difficult and very intrusive,” Boulger said. It would also be bureaucratic and expensive and this would likely raise the cost of borrowing. However, it would not be without precedent — similar affordability tests are already used by lenders in France.

“Thankfully, the proposals did not include caps on loan-to-value,” Bien said. There are no caps on loan-to-income or debt-to-income either. But it is unlikely that high loan-to-value loans will become plentiful — or much cheaper — for some time.

The self-employed, particularly those who have only recently gone solo, face a much more difficult mortgage market. If self-certification loans are banned, you would need to come up with two years of accounts or two years of self-assessment forms to prove your income. If you do not have these, you will not be able to get a loan. “A sizeable majority of borrowers would be at serious risk of being denied a mortgage,” Boulger said. It would also mean that those who have a mortgage on a self-certification basis might find it difficult to remortgage without the proper accounts.

There is some good news for borrowers: banks and building societies will no longer be allowed to levy arrears charges if a borrower is already repaying their debts.