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New rules for banks impacting homeowners

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The Financial Services Authority have announced even more rules for banks lending to homeowners who use their house to pay off their debt.

Following a two year consultation period The Financial Services Authority have released information on how to tackle risky lending.

Remortgaging has been one of the points that have been reviewed by The Financial Services Authority with processes being put into place to ensure banks are lending responsibly.

Remortgaging is a process which allows homeowners to replace an existing mortgage with a new loan from a different lender.

There are rules already in place that homeowners are expected to have if there is the need to remortgage such as homeowners having home insurance before they apply to remortgage.

Many people remortgage their houses to do home repairs, help their children, pay school fees or pay off debt that has built up.

The change in rules will end the amount of people that remortgage each year, which leads to billions of equity being withdrawn by borrowers who are eager to benefit from the value of home prices.

Hundreds of thousands of homeowners could be prevented from using their home to pay off their debts of loans and credits cards.

From 2013 anyone seeking a bigger loan will have to prove they can afford the higher repayments to what they normally pay.

Strict tests will ensure they can afford to take out equity, which has proven popular with homeowners over the years.

Anything from household spending and credit cards will all be taken into consideration to see if there is affordability.

The Financial Services Authority has no plans to stop people from remortgaging but want banks and building societies to be more vigilant with vulnerable customers that can’t make the repayments.

At the peak of housing in 2007 homeowners borrowed £155 million from banks and building societies to use the money to spend on other items other than their home with 61% taking equity from their homes.  

Even in 2010 when housing prices were at a low 45,000 homeowners took on bigger mortgages so they could pay off their debts.

Last week we wrote about the new rules being introduced for homeowners who can’t move to their second home because of negative equity new mortgage rules to be announced and we also wrote about the crackdown on mortgages mortgage lending crackdown.

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By Amanda Bainbridge