News: Weekly News Round Up - Concerns Over Changes To Lending Rules

Fri, 16 Jul 10

The number of loans for house purchases increased in May, according to latest Council of Mortgage Lenders (CML) figures.

The CML figures show that 42,000 home loans were agreed in May, this is up 2% on April and is 15% higher than May 2009. This is the 11th consecutive month that the number of loans has increased.

However, with tough new lending rules set to be implemented such monthly increases could be scarce over the coming years.

The Financial Services Authority (FSA) has outlined proposals to toughen up lending criteria, making it even more difficult for borrowers to secure a deal.

It is calling for a strict affordability test for all mortgages with lenders taking greater responsibility for assessing borrowers' ability to pay.

Borrowers will need to provide detailed verification of income in every case. In a statement the FSA says the move is “to prevent over inflation of income and to prevent mortgage fraud.”

The statement adds: “The proposed changes aim to ensure all lenders get back to the basics of responsible lending and that problems are prevented before they can develop or get out of control.”

The measures mark the end of self-cert mortgages, which were aimed at self-employed borrowers and have already been scrapped by the majority of lenders.

If implemented the proposals will also mean an end to lenders’ ability to fast track mortgage applications for low risk borrowers. These require less detailed scrutiny of borrowers’ income and are cheaper to process.

In its response to the FSA’s consultation surrounding the changes the CML says there may be “unwelcome side effects for consumers.”

The CML explains that borrowers taking out fast track loans are less likely to default on loans and scrapping them would push up the administrative costs of processing loans.

FSA plans surrounding affordability are another concern for lenders. The CML is calling on the FSA to ensure that any changes to affordability testing take into account the difference between interest-only and repayment mortgages. The CML wants to avoid a situation where affordability for interest-only mortgage applicants is assessed in the same way as those applying for a repayment deal.

Toughening up affordability testing could also make it more difficult for all borrowers to secure a deal.

CML director general Michael Coogan said: “The main consumer concern right now is about access to finance, not about risky lending.

“The industry and consumers will feel the costs of imposing new regulatory requirements now, in a market where they are not needed, but the potential consumer benefits will only be felt at some unspecified time in the future.

“We look forward to working with the FSA to ensure that a pragmatic approach to implementation can be adopted as far as possible, to reduce the negative side effects that may arise from well-intentioned regulation.”

The FSA looks unlikely to be swayed. Its latest evidence shows that nearly half of all borrowers either had no money left or were left in debt once their mortgage payments and living costs were deducted from their income.

The FSA also indicates that it wants to see a reduction in interest-only deals. It says that interest-only mortgages have been increasing in recent years. During 2007’s housing market peak just under a third of all mortgages were interest-only.

Many consumers with no repayment vehicle count on future house price rises or uncertain life events to repay their mortgage and some have no plan at all,” the FSA statement says.

Lesley Titcomb, the FSA director responsible for the mortgage market, said: “There is a clear link between financial overstretch and mortgage arrears and repossessions, and we are determined to protect vulnerable consumers by making sure that everyone who takes on a mortgage can afford to pay it back.” 

The FSA consultation regarding the changes to lending criteria and affordability closes on 16 November.

With the possibility of less people being able to secure a mortgage deal, renting is set to remain the only option.

This week the rental property website easyroommate.co.uk published its latest study into the most and least affordable cities to rent a room.

This found that York is the cheapest city to share a flat or house, at £270 a month for a room. This is the equivalent to 14% of the average monthly wage in the city.

Southampton is the least affordable city to rent a room in. In the Hampshire city 27% of the average local income is needed to secure a room. London is the second most unaffordable city.

The average rental price for a room in a home is £348 a month, which is 16% of the average monthly income in the UK.  Easyroommate.co.uk director Jonathan Moore, said: “York was hit hard with the recession, and some of the largest local employers like Network Rail and Norwich Union cut jobs. As a result, there was sharp increase in homeowners looking to rent out spare rooms to help pay the mortgage – pushing up the supply of rental accommodation. And although the local economy is on the up, rental increases have lagged behind.”

At the other end of the property market latest figures from estate agency Knight Frank show that the value of prime country homes in England is up. Prices of such property increased by 2.5% during the second quarter of the year. The south west of England saw the biggest quarterly rise.

Latest Bank of England (BoE) figures reveal that UK homeowners increased the value of their stakes in their homes by £3.2bn during the first three months of the year. This was slightly down on the £3.4bn increase during the last quarter of 2009. The BoE says the increase is due to homeowners paying off more of their mortgage and lenders requiring higher deposits.


 By Joe Lepper 

See also: Asking Price Index, House Prices and Trends by Town and Postcode, Mortgages, Life Insurance and Mortgage Protection Guide

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