by Mark Johnston
The incumbent regulator, The Financial Services Authority has released proposals to try and combat the risky mortgage lending that brought about the credit crunch and subsequent recession.Many mortgage lenders and brokers are already warning that the new rules may strangle the market and restrict many people from getting a mortgage. Worst affected are the self-employed who have ‘self certified’ themselves in order to get finance. The new rules introduced by the Financial Services Authority (FSA) might make this a thing on the past through an out and out ban.
Self certified loans do not require borrowers to prove what income they are on. Many self employed use this type of loan as they do not have payslips and may not have records showing their income over the past 3 years. Although these mortgage were popular with the self employed, they were also used by many to borrow much more than they could afford as they did not need to prove any sort of income. Many untrustworthy borrowers lied on their application form to get larger mortgages which they found they couldn’t afford. This is one of the practices that brought about the credit crunch two years ago.
The FSA will also be looking to reduce the number of interest only mortgages and make it harder to apply for one. Many borrowers chose to make an interest only mortgage as they couldn’t pay the interest and capital off together. This resulted in many homeowners having no way of being able to pay off their mortgage. When property prices slumped, many found themselves in negative equity; which meant they had no way of getting out their situation.
The main driver behind the proposal is to force the financial industry in more responsible lending. The FSA believe that by verifying that the information relating to income is correct will be a quick and simple way of seeing whether the mortgage is affordable. Research by the financial industry regulator, the FSA, found that half of all households had not spare funds once all the monthly bills had been paid, many of these not only had no cash but also had considerable shortfalls. The FSA also found that just over 40% of new mortgages had been granted without any sort of income verification being carried out.
Although following the credit crunch many lenders have all but stopped the sale of self cert mortgages, many are still offering what is known as ‘fast-track’ mortgages. Fast track mortgages are standard mortgages offered to borrowers who have a good credit rating and a lot of equity in their homes. Because these are deemed as less risky, many lenders do not carry out any form of verification or checks on their income.
Brokers are concerned that if the FSA force income verification onto the industry then many mortgages will be delayed. Additional checks and longer delays cost the industry money and with the industry in such a poor state many lenders will want to pass these costs onto the borrower.
Ray Boulger, of brokers John Charcol said: “Banks may have already tightened their lending criteria but these proposals go further and will reduce the amount of money some people can borrow. While it may protect some vulnerable borrowers, others with good credit histories who are unlikely to default on repayments will also be adversely affected.”
Melanie Bien, a director of mortgage broker Private Finance added: “There will now be swathes of people who will struggle to get on the housing ladder or remortgage. Interest-only mortgages have been extremely useful to those who may be on low incomes initially but expect their salary to rise significantly – now they are unlikely to be offered such generous deals.”
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