Britain’s banks will be forced to put new restrictions on mortgage lending following a comprehensive report by the City watchdog.
The Financial Services Authority (FSA) this week published its long-awaited Mortgage Market Review, which sets out how it thinks banks and building societies should change their approach to approving borrowers.
The review makes a number of key recommendations:
• Banks will have to assess whether potential borrowers can afford to repay their loans, which could involve in-depth scrutiny of household expenditure and bills.
• Lenders should take into account the potential impact of rising interest rates on their customers’ ability to repay.
• Loans to the over-50s will be assessed more rigorously to avoid borrowers entering retirement with unaffordable housing debts.
• Interest-only loans will be effectively outlawed unless customers can show clearly how they intend to repay the capital they have borrowed.
‘Common-sense proposals’
The FSA said that although mortgage lending had fallen sharply since the credit crunch, the changes it had put forward were designed to avoid problems in the future when credit became more freely available.
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.”
Lord Turner said that the three main elements of the review – that borrowers are assessed to make sure they can repay, that the potential impact of rising interest rates is taken into account, and that interest-only mortgages are offered much more cautiously – would help cut high-risk lending.
“But,” Lord Turner added, “it is essential that we understand what their impact would be - how many consumers would be protected from the distress of arrears and repossessions, and, how many consumers who could have afforded a mortgage might have to take out a smaller mortgage or to delay their purchase.”
Potential impact on borrowers
The FSA said that its own assessment of how these changes in lending practices will affect potential borrowers suggest only a “marginal effect” in current market conditions.
It added that they would also prevent a return to the excessive lending of the 2005-07 period, when thousands of borrowers took out loans worth 100 per cent of their property’s value.
But the watchdog is now in the process of asking banks how they feel such tightening of lending rules will affect the market.
Paul Broadhead, head of mortgage policy at the Building Societies Association, said that the final review put forward a less draconian approach than had been feared.
“These proposals seem to represent a welcome shift in policy by the FSA. No-one is looking for a regime that permits lax lending practices, however the original proposals were in danger of locking creditworthy borrowers out of the market or imprisoning those with immaculate payment records, but non-standard profiles, in their current homes and loans.”
