New Mortgage Rules Focus On Ability to Repay

Tough new mortgage lending rules to make sure borrowers are only given deals they can afford to repay and prevent a return to irresponsible lending have been outlined.

Lenders will need to consider a borrower's income and outgoings and interest-only mortgages will only be offered to people with a firm repayment plan, rather than relying on hopes that house prices will rise, when the new measures come into force in April 2014.

They will also have to factor in the impact that future interest rate increases could have on repayment costs.

Martin Wheatley, managing director of the Financial Services Authority (FSA) said: "We recognise that many lenders are now using a far more sensible set of lending criteria than before, but it is important that these common sense principles are hard-wired into the system to protect borrowers.

"We want borrowers to feel confident that poor practises of the past, which led to hardship and anxiety, are not repeated."

The clampdown follows a period during the property boom when would-be buyers increasingly stretched their finances to get on the ladder.

Last year, a house was worth around five times the buyer's income on average, compared with 3.7 times a decade ago.

The regulator estimated, as a result of lenders already tightening their borrowing criteria, up to 45% of borrowers who had taken out a deal since 2005 could be mortgage prisoners.

The Council of Mortgage Lenders (CML) previously raised concerns that many more existing borrowers could find themselves trapped under the new rules.

But the FSA has now altered its plans so that lenders would be able to "switch off" the requirements for existing borrowers who wanted to get a new mortgage for the same amount or less, provided they had a good repayment history.

It also announced a new rule stating lenders must not take advantage of a borrower who cannot get a mortgage elsewhere by treating them less favourably than other similar customers, for example by offering them a worse interest rate or terms.

The FSA has previously warned that a "ticking time bomb" has been created over the last 20 years, with an estimated 1.5 million interest-only loans worth around £120bn due for repayment in the next decade.

Paul Broadhead, head of mortgage policy at the Building Societies Association (BSA), said: "No-one can argue with the objective that lenders lend what consumers can afford to repay.

"It is common sense that a mortgage should be repayable from income, rather than rely on increasing property prices, and this is the approach that building societies and other mutual lenders already take."

However, he added it was also good to have had confirmation that interest-only mortgages could still be the right product for some people.