Jeff Salway: Small reprieve for mortgage prisoners
A SHORT five years ago lenders were still handing out mortgages on a no-questions-asked basis, churning out interest-only deals and “liar’s loans” like there was no tomorrow.
And as far as the mortgage market then was concerned, there may as well have been no tomorrow.
The property boom was at its peak in 2007 when the credit crunch arrived and sent lenders scurrying for shelter. The days of advancing mortgages to borrowers with no deposits, little income and without checking they could afford the loans were soon over, as risk-aversion set in.
Sub-prime loans disappeared almost overnight and the appetite for lending on an interest-only basis dwindled as the financial crisis deepened.
Undeterred, the City watchdog, the Financial Services Authority, has finally published a new set of rules for the mortgage market that seeks to ensure that the madness of the mid-Noughties won’t be repeated.
They’re all very sensible and, fortunately, a significantly watered down version of the original, more stringent proposals, but with consumer protection in the foreground rather than an afterthought. Yet they may still cause serious problems for thousands of existing and would-be borrowers.
The rules include affordability checks, odd as it seems at a time when lenders are scrutinising would-be borrowers to their last pound. That spells the end of self-certified mortgages, the so-called “liar’s loans” that nevertheless were still a valid source of home finance for self-employed borrowers.
Then there’s the ticking time-bomb that’s the interest-only market. The regulator isn’t banning the loans, but it says they must only be offered where there’s a credible repayment method.
It’s hard to argue with that. The problem, however, is that more than a million homeowners already have interest-only loans – and no repayment plan.
The FSA’s figures show that interest-only loans – where the capital is only repaid at the end – accounts for four in ten mortgages. If you took out a mortgage in 2007 there’s a one in three chance it was an interest-only loan. If you took it out that year there’s a three in four chance that you have no repayment plan in place.
Lenders have already backed away from the market, leaving many interest-only borrowers in dire straits. Some have withdrawn altogether, others have slashed the list of repayment methods they’ll accept or hiked the size of the deposits they’ll accept.
Thousands of Scots took out interest-only mortgages during the housing market boom, to the delight of lenders who saw no need to check that those borrowers could afford to repay them. Many now face real difficulties repaying their mortgages or getting hold of affordable alternatives, and they’ll feel like lenders have abandoned them.
The FSA set out measures to prevent lenders taking advantage of mortgage prisoners, but they’re distinctly weak. They rely heavily on lenders doing the right thing by their customers – a case of teaching an old dog new tricks, perhaps.
The housing market boom was great for some, not least buy-to-let speculators and Channel 4’s programme schedulers.
It was disastrous for many, however, and the irresponsible lending practices targeted by the FSA’s new rules will cause another 20 years of anguish yet – albeit more for borrowers than for the lenders who cast common sense aside in their greed for market share.
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