Homebuyers will now find it harder to obtain a mortgage once rules planned by the Financial Services Authority come into force. Homebuyers will find it harder to qualify because the rules will become more stringent. The way that these will be imposed is through taking a new approach to assessing how much buyers can borrow whilst imposing bans on some types of loans for some customers.
The reason for this approach is to try and stop the cavalier attitude of lenders from 2004 through to 2007 before the economic collapse. During these three years far too many families found themselves borrowing too much money on their mortgages and therefore found it hard to repay the debt. For the last three years the Financial Services Authority (FSA) has been reviewing the mortgage market in great details. Just before Christmas they revealed their findings and their proposals for the future. The result is a set of comprehensive changes that means that some homebuyers will no longer qualify for loans. They hope that the changes will add some responsibility to the heart of mortgage lending and stop giving mortgages to people who should not really have them but in turn are helping those borrowers who are creditworthy to get onto the property ladder.
The main changes to the mortgage rules are surrounding the affordability of mortgage repayments. Now both banks and building societies will have to look realistically at a buyers income and take into account all essentials such as food, heating and council tax bills and estimate that after all deductions a new mortgage is still affordable for the buyer. Payslips will have to be produced and any loans or credit card bills will have to shown as evidence to them.
Larger families which equates to those with larger outgoings will now be able to borrow less than someone without family commitments on a similar income. Interest rate changes will also have to accounted for in regards to the next five years. So if someone is struggling with a mortgage repayment now then they would have to settle for a smaller mortgage to ensure that they would be able to cope with interest rates when they do rise in the next few years.
Interest only mortgages are the first ones to be looked into. The monthly payments only cover the interest and do not repay any of the money borrowed. The rules at the moment allow the banks to offer these interest only loans on the expectation that when house prices rise then the loan can be paid off. The FSA is not totally banning these mortgages but in future they will only be allowed if there is a clear way of repaying them in the future. Some people who have taken out interest only mortgages in the past have seen them as a stepping stone onto the property market and are very grateful for offering them reduced mortgage repayments for the last few years.
Self-certification mortgages are to be banned totally, they were often popular with those who were self-employed because you did not have to prove your income. However this led in many cases to lies being told about their incomes which allowed them to borrow more than what their true earnings would have allowed. For existing customers it will be to the discretion of the bank or building society, those who have paid on time may be able to switch their mortgage to a new property but they will not be allowed to borrow any extra.
The impact of these changes will mean that there will less borrowing by consumers. 2.5% of borrowers currently being granted a loan will not qualify under new rules or would have to settle for a smaller sum. In future this could rise to 11.3% which would prevent millions of people being able to obtain a mortgage. Mortgage lenders have already become more cautious, at the height of the boom mortgage lending was Â£100 billion a year and today it is just Â£8billion.
The bad news is for those homeowners who are looking to sell their homes as there will be a much smaller market of homebuyers out there due to these new rules set out by the FSA meaning their homes could be on the market for months even years.
Fiona Davies is a director at The Property Fairy.
She has worked in the land and property sector for the last ten years.
All articles on the website are written uniquely by her.
This article is copyright free.