Worried about mortgage lending changes? - In-Deed's property lawyers explain all!
The last couple of days there have been a substantial amount of news on mortgage lending changes. Indeed, mortgage changes have the potential to affect most of the country whether you’re buying, selling, a homeowner or would like to own your own home in the future.
At In-Deed we understand the importance of understanding exactly how these new rules may affect you. We also understand how this industry is notorious for “keeping it confusing” by using baffling language no one really understands. This article, written by our In-Deed property lawyers, aims to help you understand these important changes.
This week the FSA unveiled new rules for banks on approving mortgages, to make sure customers are not able to borrow more than they can afford.
The FSA (Financial Services Authority) is an independent non-governmental body who are financed by the financial services industry. They are accountable to Treasury Ministers and, through them, Parliament and have been given a wide range of rule-making, investigatory and enforcement powers. Ultimately, this means they have the power to influence how banks operate and in this case mortgage lending.
In this instance the FSA have introduced new rules on how banks verify income for every mortgage application and to make sure banks consider bills and regular outgoings.
- A ban on self-certification mortgages.
- Crackdown on interest-only mortgages.
- Better affordability checks.
- New rules for those wanting to remortgage.
- Changing how advice is given by mortgage brokers.
- Lenders have to be fairer to borrowers who have fallen into arrears on their mortgage repayments.
How will the affordability tests work?
A bank will consider how much you spend on essential household expenditure such as heating and council tax plus basic living costs and other debt commitments. Banks will no longer have to consider how much you spend on discretionary spending such as going out and holidays as it recognises your ability to change spending habits.
Banks will also conduct a “stress test” on your mortgage application. This means they will assess your ability to afford your mortgage repayments if interest rates rise in the future.
Can I still get an interest-only mortgage?
Yes – but it will be a lot harder. You will only receive an interest-only mortgage if you can prove you have a strategy to repay the capital, such as from the sale of a second home or have an Isa (Individual Savings Account) or from regular payments of income such as bonuses. You will no longer be able to rely on the hope of rising property values.
What about if I want to remortgage?
If you are worried you won’t meet the new mortgage rules, but want to remortgage don’t panic, the FSA have introduced “transitional arrangements” to help existing creditworthy borrowers that might not be able to move home or refinance as a result.
Lenders will be allowed to waive the new affordability rules for existing borrowers if you have met repayments for at least the last 12 months and have not fallen into arrears. However, it is important to note that transitional arrangements only apply to borrowers who are not seeking additional borrowing and the monthly payments are the same or lower than the existing mortgage payments.
Existing borrowers who need to borrow more will be subject to the new affordability rules.
The FSA are trying to introduce these new rules to prevent another boom in mortgage lending and in house prices if people cannot really afford to repay their loans. This is what happened in the middle of the last decade and is part of the reason why we are in the current economic crisis. Scarily, if interest rates hadn’t have been kept so low hundreds of thousands of borrowers would be facing repossession.
Although the above changes sound scary and dramatic it will actually change relatively little in the current mortgage market, as since 2008 it has become very difficult to get a mortgage. What the changes will affect are lending practices in the future.
Experts believe house prices will not decrease further as a result of new lending rules, however, it does mean there is very unlikely to be an improvement in the housing market for the foreseeable future.
In the short term very little is likely to change. However, in the long run the new rules may help you as they will help to suppress artificial house price booms that lock out first-time buyers.
The Council of Mortgage Lenders says the proposals strike the right balance. Nationwide building society says it could mean borrowers waiting longer for loans at busy periods. On the whole the majority of the field have welcomed the FSAs proposals in the hope it will create more stability in the future.
The FSA will continue to discuss these latest proposals until March 30 2012 and then make a final decision on the form of the rules in the summer. Implementation is not expected to occur before 2013.
From a conveyancers point of view less people receiving mortgages means fewer conveyancing instructions. However, rather than grumbling about this we instead welcome the FSAs proposals. And here’s why.
In the conveyancing market there are a number of ‘shoddy conveyancing firms’ which unfortunately lower standards of conveyancing and our client’s expectations. We hope the increased competition will help improve the conveyancing market as a whole and force our competitors to offer a higher level of customer service in order to compete. Ultimately, this means the conveyancing market improves and customers receive a much level of service, no matter who does their conveyancing!
We also believe tightening of mortgage lenders rules will create a more stable housing market in future years, which benefits both us and our customers in the long term.
Are you thinking of buying or selling a house, but are confused about the housing process or about conveyancing? Then please do not hesitate to call In-Deed! Our advisers are always happy to have a chat and endeavour to help as much as possible. And of course all calls are private and confidential and we won’t pressure you into using our service.