Rule changes set to leave millions in mortgage trap

Many self-employed, low income families, first-time buyers and older workers would be permanently barred from home ownership, with a further 5.6 million trapped in loans they could no longer afford.

This is the stark warning from independent reports commissioned by the Council of Mortgage Lenders, which represents banks and building societies. They claim if consumers are burdened with onerous new rules, in the first year alone 483,000 potential buyers and remortgagors would be hit. Of these 150,000 would never get a foot on the housing ladder, and the property market would shrink by 42 billion.

Chief watchdog, the Financial Services Authority is currently consulting on plans for a radical mortgage market review, to prevent another property boom and bust. It is proposing that all borrowers will have to undergo detailed income and rigorous affordability checks, with all loans subject to a 25-year repayment term. Interest-only and self-certified mortgages would cease to be available.

But a report from social research consultancy, Policis, for the CML, says that the proposals as currently envisaged would cause far more harm, than they would improve consumer protection. They would punish the great majority in an attempt to protect a tiny vulnerable minority, as regulators concentrated on "fighting the last war".

In the light of these findings, the CML is urging the FSA to go back to the drawing board. Furthermore, it has called on ministers to urgently debate the kind of housing market they would like to see in future years.

The Policis research, for example, concluded that with 85 per cent of families buying their own homes, property was highly valued for giving individuals a sense of control over their lives, and was seen as crucial to building up assets for themselves and their families.

It says that despite the credit crunch and recession, the overwhelming majority of borrowers continue to meet repayments with only 1 in a hundred facing acute distress.

Finally, it claims that the big problem currently facing consumers was the mismatch between aspirations and the availability of credit, which was frustrating their ambitions to become home owners. However, today's difficult market would become critical if the FSA proceeded with current plans.

It estimated that 19 per cent, or 2.2 million, current borrowers, would never again qualify for a loan, trapping them with their existing lenders, and preventing them from ever moving house.

A further 30 per cent, or 3.4 million would see the amount they could borrow cut. Many first-time buyers would never qualify for a loan.

Other groups, such as the self-employed, older workers or low income employees might also find themselves banned from home ownership.

An insistence that all borrowers show details of their income could prove too onerous for many self-employed borrowers. Similarly, insisting that all loans are written on a capital and repayment basis, spread over 25 years, may exclude anyone older than their mid-40s from borrowing.

CML director general Michael Coogan said: "The FSA, like the industry, needs to have a clear steer from the coalition government about what type of regulatory structure is needed to support housing policy and deliver systemic stability in the mortgage market in the 21st century.

"Before we go much further we need ministers to be clear about their intentions. Whether they want regulation to protect the vulnerable minority, or give an opportunity to the majority to achieve their aspirations."

Leading building society boss, Iain Cornish believes sudden radical changes could damage the UK economy, and stunt recovery. He says it is vital the FSA does not to rush into imposing a new regulatory regime.

Cornish, chief executive of Yorkshire Building Society, said: "It is sensible to look at regulation, given some bad practices which developed during the last boom and literally brought banks down.

"Now is quite a good time to consider these issues, as the market has largely corrected any boom excesses itself. What I don't see is why there is any urgent need to rush into anything further. Home ownership is hugely important not only to the UK economy but also to our social fabric. Any changes could have enormous macro-economic consequences, and huge consequences for society. I can see no burning necessity why we should rush into change, without the full implications being thoroughly studied."

How to break free

Switch to a new deal with your existing mortgage lender. Most lenders do make their best deals available to existing customers.

Keep your credit history in pristine order, and organise your affairs to minimise any financial slip which could put black marks against you. Pay every bill on time. Set up direct debits so you know you'll never miss a payment.

Tidy up your finances. Close accounts you hardly ever use. If you have lots of credit cards, close some of them.

Pay off personal loans or overdrafts.

Lenders may ask to see bank statements for six months to judge your income and expenditure patterns, to assess whether you could afford repayments. Keep spending to the minimum and thus boost affordability.

If you have an interest-only mortgage, do not give it up as you may never be able to replace it again.

Consider an offset mortgage, which gives flexibility about reducing the debt without giving up access to your savings.

'So many buyers are being barred from the market'

When first-time buyer Ben Ripley began flat hunting, finding a mortgage proved an enormous obstacle to buying his dream home. Only three lenders would consider applications from new buyers, like him, with a 10 per cent deposit.

He and partner Ebru Hamilton, who had been renting for some years and reached the point where they wanted to buy, couldn't face delaying it any further.

But before they could even begin to look for a home, they knew they needed at least a tacit mortgage offer, and that would not be easy to come by.

Ben, a surveyor, said: "It was very frustrating. Initially there was almost nothing on the market for which we could apply. Then, just three deals became available. Even so, they were two-year offers, when we would have preferred something longer.

"I felt we were being penalised for being first-time buyers, but if we wanted to take advantage of a slow market and low prices, we just had to stomach it."

Initially, Yorkshire Building Society, which had the best first-time buyer deal at that point, gave Ben an agreement that it would consider an application from him and Ebru, who works for Heriot -Watt University.

Ben said: "This wasn't an approval, but an agreement to consider us for a mortgage. But it let us start home hunting and put in an offer on a flat we saw in the west end of Edinburgh."

However, shortly afterwards, his own bank HSBC came up with a deal which suited them even better and they are set to move into their new home on Friday fortnight.

"Ben says: "In the end everything went smoothly and there were no problems verifying our income. I'm sure it helped that I was dealing with my own bank, and they already knew me.

"But it does seem unfair that so many young buyers are being barred from the market. The reality is that you will pay much the same in rent for a two-bedroom flat in Edinburgh as you would for a mortgage.

"However, unless you have significant financial support to get together a 25 per cent deposit, as a first timer you will have many almost insurmountable hurdles put in your way to prevent you from buying."