The Financial Services Authority announced today that millions of UK borrowers could be turned down for a mortgage under their tough new proposals.
The plans call for tougher restrictions on how homeowner loans are approved to prevent a return to irresponsible lending which saw lenders handing out mortgages with only cursory checks on borrower’s ability to make repayments.
In the past irresponsible lending saw ‘together’ mortgages which offered and granted loans worth 125% of the value of a home with others allowing people to borrow seven times a borrower’s income.
Anyone seeking a mortgage will be required to provide more evidence of household spending from fuel bills to childcare costs before their loans are approved, the measures are hoped to stop people taking out mortgages that they simply cannot afford.
When assessors look at a mortgage application there are three points that will have to be looked at, they will have to assume interest rates may rise from their current low levels, not let borrowers rely on possibility of rising house prices to claim they can eventually repay and assess interest only mortgages as repayment ones unless there is a believable source of money to pay off the loan.
Lord Turner, chairman of the Financial Service Authority defended the new proposals saying: “We believe that these are common sense proposals which serve the interests of both lenders and borrowers.
“While the excesses of the pre-crisis period have largely disappeared from the current market, it is important to ensure that better practice endures in future when memories of the crisis recede and the dangers of poor practice return.
“The three key proposals are, we believe, the most effective way to tackle the problem of risky lending.”
However an assessment has revealed that the plans could disrupt growth by stripping £2.9 billion out of the economy and lead to a dramatic decrease in mortgage applications.
It is estimated 225,000 prospective mortgage holders would be turned down for mortgages or be granted a smaller one than they need if the new proposals are already applied.
The proposed new rules also highlights interest-only mortgages that can still be offered if there is a credible plan to repay the loan.
The new mortgage rules are hoped to cut the amount of people that lend more than they can afford, they are expected to be implemented in 2013 by The Financial Services Authority.
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By Amanda Bainbridge