New proposals by the Financial Services Authority (FSA) to regulate mortgage lending will require lenders to refuse mortgage applications that are beyond what the homebuyer can reasonably afford.
However, the current FSA proposals stop short of imposing limits on the loan-to-value ratios of mortgages, which relate to the size of the mortgage as a percentage of the value of the property, and would require borrowers to have a larger deposit on their home.
This means that lenders are still free to offer a mortgage equal to 90% of property value. Of course, lenders are still free to set their own loan-to-value policy, and the largest lenders are currently looking for mortgage deposits over 25% to obtain a mortgage.
End to Self-certified Mortgages?
The FSA proposes that, in future, all mortgage borrowers be required to document their income. This spells the end of self-certified mortgages, where lenders accept on trust the word of some borrowers, and in particular the self-employed, with regard to their level of income. In future, self-employed homebuyers will have to produce 2 years’ of certified accounts to back up their mortgage application.
Lenders Must Gauge ‘Mortgage Affordability’
The FSA’s proposals will place the onus on the lender, not on the borrower, to assess the ‘affordability’ of a requested mortgage for the homebuyer. This will lead to stricter controls on those wishing to take on a large mortgage payment that would strain their personal finances. The FSA also proposes lenders should identify situations defined as ‘toxic combinations’, which also raise the risk level of a mortgage loan. A ‘toxic combination’ is a set of circumstances particularly likely to result in a loan default, for instance, where borrowers with imperfect credit records seek loans at the upper end of their ‘affordability’ limit. Such borrowers are more likely to succeed with the help of good, independent mortgage advice.
