Forthcoming Changes to the Mortgage Market

The Financial Services Authority (“FSA”) is proposing new changes to mortgage lending regulation, with plans for this to be introduced during the summer of 2013.

These measures are, in essence, being put in place in an attempt to avoid a situation of overly risky lending and property prices booming. Additionally, there is concern that some borrowers are being left with substantial sums outstanding at the end of their mortgage term. The proposals are not yet finalised, but are likely to centre round a much more robust approach to assessing whether a mortgage is affordable (or not) for the applicant.

In addition to these proposals for new loans, the FSA is also looking to strengthen the criteria for borrowing on an ‘interest-only’ basis (where no repayment of capital outstanding is made during the term of the loan).

Historically, lenders have accepted a variety of situations which they considered would ultimately repay such a loan. Acceptable repayment vehicles in the past have been ‘sale of property in future’ or ‘overpayments of monthly mortgage amount’ – both of which could perhaps be argued as somewhat tenuous commitments to repaying the loan.

The FSA would rather see a more structured approach to repaying an interest-only loan and if overpayments are to be the key, then an assessment of income and expenditure along with the ability to meet such overpayments must be proven to be genuine. If this is the case, then it may be better to have a repayment mortgage in the first place if it is proven to be affordable.

Many borrowers who have an existing interest-only mortgage may find that in due course they receive a very different offer from their lenders when it comes to arranging another deal with them, with the possibility of increased interest rates to incentivise a move towards a repayment mortgage (and the increased certainty of mortgage repayment) wherever possible.

Lenders are likely to take steps to address some of the issues related to the repayment of an interest-only loan and the possibility exists that a ‘plausibility check’ will form part of the underwriting process, to determine the feasibility of a borrower’s repayment vehicle and ability to repay the loan.

Experience tells me that the following are reasons why this may occur. Firstly, it provides transparency to borrowers around what is acceptable to support interest-only elements of mortgages and secondly, borrowers will know exactly what element of their loan they can have on an interest only basis and can gauge with a greater degree of certainty that their chosen investment vehicle will repay this element of their mortgage.

Borrowers who are looking at an interest-only mortgage in the future, perhaps with a view to try and further reduce their monthly outgoings, or those already with one, should be mindful of these changes and be prepared to either move some of their mortgage on to a repayment platform or to have their choice of lenders in the market.

Kerry Chaloner
Property Finance Consultant

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