New buyers squeezed out by tighter mortgage rules

The recommendations by the Financial Services Authority (FSA), which are set to come into force within 18 months, will see an end to self-assessment and fast-track deals.

They will also clamp down on offers of interest-only mortgages and lending to people nearing the age of retirement.

Industry leaders have welcomed the changes, although some warned they could further depress the housing market as buyers faced more obstacles to securing a home loan.

The far-reaching changes to the money-lending rules mean that income will have to be verified in every application and lenders should also place greater emphasis on regular outgoings, such as childcare, recreation, clothing costs and household bills.

“While risky, lower-quality lending may currently be restricted, there is a real danger that, as funding comes back into the market and lending starts to pick up again, there will be increasing pressure on firms to consider higher-risk lending and focus more on market share than maintaining lending standards,” the FSA report said.

“The risk of an increasing number of interest-only mortgages reaching maturity without adequate repayment strategies is likely to pose a significant challenge for both consumers and lenders alike over the coming years.”

The new rules spell the end of self-certification mortgages, often used by the self-employed, which have been dubbed “liar loans” because applicants declare their own earnings.

It also means the end of “fast-tracked” mortgages, an accelerated approval process under which verification of income may not be asked for at the lender’s discretion.

For those looking to take out an interest-only mortgage, the changes means they should be offered only where there is a credible plan to repay the capital, and borrowers cannot just rely on rising house price hopes.

Interest-only mortgages should be considered a “niche” product, the report said, adding: “We would expect most mainstream lending to take place on a capital-and-interest basis with interest-only being considered in limited circumstances.”

Lenders will be able to provide new mortgages to some existing customers even where they do not meet the new affordability requirements, the FSA said.

It estimated that up to 15 per cent of borrowers who took out mortgages between 2005 and 2010 could be in negative equity, and also expressed concern about borrowers who are “trapped” into paying a high interest rate by their current lender because they are unable to go elsewhere.

The report said: “While low interest rates have flattered the picture and helped some borrowers, there are real dangers that the current low interest rate environment could simply be storing up more problems for the future, with many people taking on low interest rate mortgages now, which may subsequently prove unaffordable.”

FSA chairman Lord Turner said: “We believe that these are common-sense proposals which serve the interests of both lenders and borrowers.

“While the excesses of the pre-crisis period have largely disappeared from the current market, it is important to ensure that better practice endures in future, when memories of the crisis recede and the dangers of poor practice return.”

The proposals follow a review paper published in 2009 and are subject to consultation until 30 March.

The FSA plans to publish final rules next summer and does not plan to implement the proposals before the summer of 2013.

But it said that if there was widespread support for particular plans, for example in relation to mortgage arrears charges, it might implement some aspects sooner.

Neil Harrison, spokesman for the Edinburgh property group ESPC, welcomed the changes, but said the announcement could have a short-term impact on the market.

“From a stability point of view, that people can only take out a mortgage if they can afford to pay it, as well as taking into account the cost of living, then it’s a good thing. It will make sure people will take on an affordable debt.

“In the short term it might have an impact on the first-time buyers’ market as people start thinking that there is no way they will be able to get a mortgage,” he said.

Scott White, who represents several independent financial advisers across Scotland said getting “back to basics” could only be a good thing.

“We have been very credit-driven for generations,” said Mr White. “Not just mortgages but overdrafts, credit cards, store cards, and there has not been enough to promote the dangers of credit – instead, the benefits of immediate credit have been talked up.

“We need to get back to an almost post-war commitment to mortgages. People have to understand the gravity and importance of what they are taking on when they get their first set of house keys.”

David Alexander, from Edinburgh and Glasgow estate agent DJ Alexander, said the measures would ensure that only those who could afford a mortgage would get one.

He also said the end of self-certification mortgages could only be a good thing.

The proposals have also been welcomed by the Council of Mortgage Lenders (CML).

It had originally feared the plans would harm consumers and lenders, but said it was satisfied the FSA had listened to its concerns and was providing “sensible safeguards”.

CML director-general Paul Smee said: “Whilst there is much detail to be pored over, the FSA’s new proposals seem to strike broadly the right balance.

“If lenders are to make their contribution to improving the supply of housing and to the wider agenda for economic growth, then they need a regulatory framework which also supports that objective.

“We look forward to working with the regulator to iron out any remaining wrinkles and to move towards a smooth process for implementation.”

Paul Broadhead, head of mortgage policy at the Building Societies Association, said: “No-one is looking for a regime that permits lax lending practices. However, the original proposals were in danger of locking credit-worthy borrowers out of the market or imprisoning those with immaculate payment records, but non-standard profiles, in their current homes and loans.

“This seems to have been avoided, which is good news for the self-employed, those in existing self-certified mortgages and people with negative equity. The new regulations appear to have struck a reasonable balance.”