A tightening of mortgage lending rules is set to make it more difficult to get a loan. The Financial Services Authority - the financial services industry watchdog - has proposed new regulations to cut down on the number of people who borrow more than they can afford.
The new rules specifically propose a ban on self-certified mortgages, which have been blamed partially for causing the financial problems experienced at the likes of Northern Rock and Bradford & Bingley.
Self-certified loans were introduced to help freelance and self-employed people arrange a mortgage and lessen the red-tape burden on the many thousands of people who do not have a regular payslip to prove their income but nonetheless can afford to take on a mortgage.
Before the loans were launched, the self-employed were often penalised through being charged higher interest rates as well as lenders demanding at least three years of certified accounts before they would approve a mortgage.
Self-certified loans allowed such people to fast-track their mortgage by making a declaration of their income without needing to produce detailed accounts and paperwork to back up their claims.
But problems started when people - including some unscrupulous mortgage brokers - realised they could put any income figure on their application knowing that some lenders wouldn't check the figures too carefully. This was especially true of newer lenders keen to build up substantial mortgage books as quickly as possible.
As a result the self-certified mortgages became known as "liar loans" as they allowed people with little or no income to get a mortgage. In that, they were aided by pushy mortgage salespeople keen to get the commission they would make by arranging a mortgage.
The net result was that several lenders were left with loans that were unlikely to be unpaid and thousands of people got in over their heads with mortgage repayments beyond their means.
How will the new mortgage rules will affect you?
That's why the government has been forced to act to change the rules and the watchdog is now consulting with the mortgage industry until January to assess the impact of its new proposals.
The problem is that while the tighter lending rules may help stop families over-committing themselves, the FSA’s proposals could also hit anyone planning to take out a mortgage or remortgage.
A ban on self-certified loans would hit the self-employed and freelance workers, while new affordability tests - also included in the proposals - could make it harder for first-time buyers to get a loan.
Existing borrowers may also be hit when they come to remortgage as more cautious lenders may move them into a higher risk bracket. The result could be that they are refused the best rates and forced to take a less competitive deal.
The proposals may mean a return to the days of plenty of red-tape and paperwork for self-employed people. Just like in the past, they will need to provide three years’ worth of accounts, or a letter from their accountant confirming their income.
How can you get a mortgage if the lending rules are changed?
Anyone with less than three years’ self-employment may still be able to get a mortgage, if they can prove affordability.
Many lenders already use affordability rather than income levels as a way to decide whether to agree a loan. They generally want to examine bank statements – say six months’ worth – to see how much money you have coming in and what your outgoings are.
If the FSA’s proposals are adopted, lenders are likely to ask for even more details of your spending, right down to bills, insurance costs, pension contributions and even your personal spending.
The net result will be that if you can’t prove you can afford a mortgage, you won’t get one. On top of that, existing mortgage-holders who may have inflated their income to get their loan could have problems if they need to remortgage.
Shopping around to find the right deal will become more crucial than ever and potential borrowers may have to search just a little bit longer to find a lender prepared to offer them a loan.
