There is good news in that there is an immediate change which benefits existing borrowers. This new Mortgage Market Review rules prevents lenders from limiting certain products to new borrowers only. Any mortgage product has to be offered to existing and new borrowers on the same terms.
Under the new rules, lenders will have to consider a borrower’s net income against their committed and basic essential expenditure. They will also have to assess the potential impact that interest rate rises may have over the five years following the grant of the mortgage, on the affordability of the mortgage. However, lenders do not have to consider discretionary spending when deciding whether to grant a mortgage.
There are also changes to the rules on mortgage advice in that for most circumstances lenders will have to recommend the mortgage most suitable for the borrower. This will not apply to simple contract variations providing there is no increase in the amount to be lent.
Mortgage professionals can opt out of the advice rules and these will not apply to mortgages applied for online or by post. Exceptions will apply to high net worth borrowers (defined as those with a minimum annual net income of £300,000, or minimum net assets of £3m) and business customers borrowing against their home. This is because the FSA feel that these borrowers have different characteristics and circumstances compared with the majority of borrowers.
For these parties there will be less stringent affordability checks and they can opt out of mortgage advice. Business customers will have to show that they have a credible business plan. The new rules will not apply to buy-to-let mortgages as they are treated as commercial loans.
Whilst interest only mortgages will still be permitted, the lender and/or borrower will no longer be able to rely upon rising house prices or hoped for inheritance. The borrower must have a demonstrable and credible repayment proposition for the end of the term. However, assistance is offered to existing borrowers who remortgage as there will be transitional provisions allowing lenders to relax the affordability rules and the interest only rules on the proviso that the borrower is not requesting an increase in the amount being borrowed.
This will help existing borrowers who cannot comply with the new requirements on affordability and interest only loans. In addition, the lenders will be able to use these rules when they are considering a remortgage facility for a borrower who is switching from another lender.
IT COULD HAVE BEEN WORSE
Many things were predicted for these new rules that simply did not happen. For example, there are no restrictions preventing higher loan to value mortgages being offered to first time buyers or age limits on mortgages preventing older borrowers taking a mortgage for a term which extends beyond their retirement. For the self-employed borrower, lenders will still have some flexibility in considering what evidence to accept from them as to income. All of this will allow some to breathe a sigh of relief.
THE FUTURE OF LENDING
Mortgage lenders have for some time been changing their lending requirements in anticipation of the new rules as evidenced by the fact that new mortgages are currently being issued at half the volume they were five years ago due to more stringent requirements already being imposed. However, these rules will make these requirements permanent and will not allow the mortgage lenders to relax their rules again once the economy is back on a high.
Ultimately these rules should lead to a more responsible lending market, where borrowers only take on debt that they can afford to repay, which in turn will make the property market more sustainable.
What the new rules do not do is assist the first time buyer who continues to face stringent requirements and high property prices and none of the advantages enjoyed by previous generations in the products that allowed them to step on the property ladder.
The FSA has not finished with interest free mortgages and is currently carrying out an analysis to see how many existing interest-only borrowers may be unable to repay the capital and is seeking to understand what steps lenders are taking to address this issue. They expect to publish their findings in the first quarter of 2013.
The author Samantha Hook, is a Partner, Transactional Finance, at Howard Kennedy LLP.