The FSA's Mortgage Market Review has at i's core three principles of good mortgage underwriting:
- Mortgages and loans should only be granted where there is a reasonable expectation that the customer will be able to repay the loan without relying on future house price rises. The responsibility for assessing affordability will rest solely with the lender
- This affordability assessment should make allowance for possible future interest rate rises
- Interest-only mortgages should be assessed on a repayment basis unless there is a believable strategy for repaying the loan which does not rely on house price rises
Following consultation, the FSA will make a decision on the final rules in the summer of 2012 with full implementation not before 2013.
Any future regime is likely to have the following features:
- Income to be verified in every mortgage application - bringing an end to self-certificated mortgages
- Lenders will not have to interrogate in detail applicants spending but must not ignore unavoidable bills e.g. heating & council tax
- Interest-only mortgages can still be offered but borrowers will have to have a credible plan to repay the loan without relying on the rise in house prices
- Lenders will have to consider the impact of increases in interest rates in line with current market expectations
- Some applicants, such as those trying to consolidate loans will have to get advice to ensure they understand the full implications and costs
- Existing borrowers will be unaffected and lenders will have the flexibility to provide new mortgages to some existing customers even where they do not meet the new affordability requirements
- Lenders will have to adopt a prudent and proportionate approach when assessing income where the lending term goes beyond the applicant's state retirement age
As the responsibility for assessing affordability will rest with lenders it could mean that they become more involved in the original mortgage application process. If this happens then lenders may prefer direct sales rather distributing their products through mortgage brokers. Understandably mortgage brokers are nervous that their business could dry up under the new proposals.
