FSA: new rules for mortgage borrowers
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by Gill Montia
The Financial Services Authority (FSA) has set out new rules aimed at putting “common sense” at the heart of the UK mortgage market and making sure future borrowers don’t end up with home loans they can’t afford.
The new rules come into effect on 26th April 2014, although one measure has been activated already to help borrowers who might be trapped by today’s tighter lending criteria, as follows:
“The measure being activated immediately … will protect existing borrowers who find themselves unable to remortgage (whatever the reason), and prevents lenders from taking advantage of the customer’s situation, or treating them less favourably than other similar customers, for example by offering less favourable interest rates or other terms.”
According to the FSA, the overall effects of the new rules on different types of borrower are as follows:
1. All customers – all customers will need to satisfy lenders that they can afford the mortgage, and provide evidence of their income.
Most mortgage sales will require advice, particularly interactive sales (such as face-to-face or telephone sales).
The new rules do not prevent higher loan-to-value lending, and interest-only will be allowed if the borrower can show that they have a credible repayment strategy.
2. First time buyers – the new rules do not prevent higher loan-to-value mortgages being offered.
3. Existing borrowers that cannot meet the new affordability requirements – lenders can “switch off” the affordability and interest-only requirements for existing borrowers who want to get a new mortgage for the same amount or less.
While any lending decision is a commercial one, lenders will also be able to use these arrangements to take on the customers of other lenders.
Lenders will, with immediate effect, be prevented from treating these customers less favourably than other customers.
4. Older consumers – the new rules do not apply any age limits or prevent lending to older consumers, including beyond retirement.
5. Self-employed – the new rules give lenders flexibility to decide what type of evidence of income to accept from self-employed customers.
6. Entrepreneurs (business people borrowing against their homes) – a flexible approach applies and these borrowers will be able to secure a mortgage on an execution-only basis providing they confirm they are happy to “opt out” of the suitability tests.
Lenders must see a credible business plan before providing a mortgage.
7. Right-to-buy – customers who are exercising their right-to-buy will always be required to get mortgage advice.
8. Shared equity – customers who are also getting a second charge shared equity loan to assist in their property purchase will need to be able to afford the payments on the shared equity loan as well as their mortgage.
9. Credit-impaired borrowers – the rules do not prevent customers with an impaired credit history from getting a mortgage, as long as they can afford it.
Where they are consolidating debt they must get advice.
10. High net worth customers – a flexible approach applies and these borrowers will be able to secure a mortgage on an execution-only basis providing they confirm they are happy to “opt out” of the suitability tests.
FSA managing director, Martin Wheatley, comments: “We recognise that many lenders are now using a far more sensible set of lending criteria than before, but it is important that these common sense principles are hard-wired into the system to protect borrowers.”
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