Thousands may be trapped by new mortgage controls

The Mortgage Market Review (MMR), published this week by the Financial Services Authority (FSA), features a clampdown on irresponsible lending by making lenders do more to ensure borrowers can afford the repayments on their mortgage.

It also imposes restrictions on interest-only mortgages. The regulator has stopped short of the outright ban on interest-only loans that was earlier threatened, though many lenders have pre-empted the move by withdrawing from the interest-only market.

The rules don’t come into force until April 2014, but already some experts are warning that while the measures are largely sensible, they come with unintended consequences that could hit interest-only borrowers particularly hard.

So what’s happening and how will you be affected? Here we answer some of the key questions.

WHAT ARE THE NEW RULES?

The FSA’s aim is to ensure the excesses of the housing market boom – and the problems they created – are never repeated. There’s an element of the stable door being slammed shut long after its last resident has bolted, said Dr John Boyle, head of research at Rettie & Co.

“The new proposals will tighten lending rules, but the banks have largely been doing this anyway.

“So I’m not sure if this will make any real practical difference, except maybe to ensure that a bubble like the last one doesn’t happen again.”

The requirements under the new rules include:

• Borrowers must satisfy lenders that they can afford mortgage repayments and lenders must carry out affordability checks. This applies not only to new customers but also most of those moving to a new deal with the same lender.

• Interest-only mortgage customers have to show they have a robust repayment plan in place.

• There will be no ceiling on the age at which a borrower can take out a mortgage

• Lenders must not take advantage of borrowers unable to get a loan elsewhere by offering them more expensive terms.

WHAT WILL THE AFFORDABILITY CHECKS ENTAIL?

In 2007 more than half of all mortgages were sold without the borrower’s income being verified. That changed dramatically with the credit crunch and the new rules effectively enshrine the common sense approach by making lenders carry out checks to ensure people can afford repayments and cope with interest rate rises. This applies even if you’re moving to a new rate with the same lender, extending your loan beyond retirement or transferring to a different type of mortgage repayment plan.

Borrowers will be asked more detailed questions on their financial situation when lenders are assessing affordability and must be able to show they have a reliable repayment strategy. This will make application processes longer, however, and that could result in extra costs to lenders that will inevitably be passed onto borrowers in the form of more expensive mortgages.

Borrowers with income of at least £300,000 a year or more than £3 million in assets will be subject to less stringent affordability checks.

CAN I STILL GET AN INTEREST-ONLY MORTGAGE.

Possibly, provided you meet stringent lender requirements and have a robust repayment plan in place. While the FSA has stepped back from its original threat to ban the loans, lenders have pre-empted restrictions on interest-only mortgages by either pulling out of the market or considerably tightening their criteria.

Few banks will lend on an interest-only basis to borrowers with equity or a deposit of less than 25 or even 50 per cent. Some, including the Lloyds brands, will no longer accept cash savings as a repayment strategy. What’s for certain is that borrowers can’t now rely on house price inflation as a repayment plan.

I’vE GOT AN INTEREST-ONLY MORTGAGE. WHAT NOW?

More than 40 per cent of outstanding mortgages are on an interest-only basis, including a third of those taken out in 2007. Three-quarters of interest-only loans taken out in 2007 have no repayment plan in place, according to the FSA, and the recent lender shift away from the market spells trouble for many of those borrowers. Many will be unable to secure an alternative mortgage and will be moved onto their lender’s expensive standard variable rate mortgage, as a result, while some will see their mortgage terms extended and even struggle to repay their loan during their lifetime.

Experts strongly advise interest-only borrowers to overpay their loan, if possible, to boost their equity, and to speak to their lender to find out which repayment methods are acceptable.

Many, however, will be shifted onto their borrower’s variable rate capital and interest mortgage and face higher loan repayments as a result.

CAN I REMORTGAGE?

Up to 45 per cent of borrowers who have taken out a mortgage since 2005 could be mortgage prisoners, rising to 55 per cent of first-time buyers. That means they’re unable to remortgage to a better deal or move home, perhaps because they’re in arrears, in negative equity, have credit history problems, too little equity in their home or have an interest-only loan.

The FSA has taken steps to help mortgage prisoners by allowing lenders to disregard the new income and affordability rules, provided those borrowers don’t take out more debt.

Under transitional rules coming into force immediately, lenders must not take advantage of borrowers who can’t get a mortgage elsewhere by treating them less favourably than other customers.

That means not shifting them onto more expensive loans, for example, but it’s unclear how this will be enforced. And it doesn’t necessarily solve the problem for borrowers who can’t get a deal elsewhere, as they may be stuck with a lender with far less competitive rates than available on the wider market.

WILL IT BE EASIER FOR ME TO GET ON THE PROPERTY LADDER?

It won’t make much difference, on the basis that for those without deposits of 10 per cent or less, choice is already limited and lending criteria is tight.

Lenders are already assessing first-time buyer affordability very thoroughly, although the affordability requirements may make the application process longer. The affordability rules means self-certification mortgages – once dubbed “liar’s loans” – will be history, a blow for self-employed borrowers in particular. The crackdown on interest-only loans also removes what has been a valid option for a minority of first-time buyers.

One positive for would-be buyers, given the rising age of the average first-time buyer, is that the FSA won’t insist on affordability being assessed over 25 years (regardless of the actual mortgage term).

Robin Purdie, director of MOV8 Financial in Edinburgh, said: “To effectively restrict affordability terms to 25 years would have been a huge blow to first-time buyers and therefore the market in general.”

CAN I GET A NEW MORTGAGE WITHOUT HAVING TO TAKE ADVICE FIRST?

Only in certain instances, ie you have income of at least £300,000 a year, you’re a mortgage professional or it’s a business loan, for example. There may also be an exception if you don’t want to borrow more but merely want to change the repayment method, switch your rate or port your mortgage.

Most mortgage sales must be advised, however, and that’s good news for borrowers, said Purdie.

“This will help to eradicate some of the dreadful “advice” that we see from lenders’ direct sales forces,” he said. “If professional standards can be raised across the board, then this can only be a good thing for the consumer and the reputation of the industry alike.”