The City watchdog, the Financial Services Authority (FSA), has announced proposals to reform the way mortgages are offered to borrowers. Lenders, consumer groups and the industry have until 30 January 2010 to respond following which the FSA expects to publish its findings in March 2010 with implementation soon after.

The review’s key features are:

• Imposing affordability tests for all mortgages and making lenders ultimately responsible for assessing a consumer’s ability to pay;
• Banning ‘self-cert’ mortgages through required verification of  the borrower’s income;
• Banning the sale of products which contain certain ‘toxic combinations’ of characteristics that put borrowers at risk;
• Banning arrears charges when a borrower is already repaying and ensuring firms do not profit from people in arrears;
• Requiring all mortgage advisers to be personally accountable to the FSA;
• Calling for the FSA’s scope to cover buy-to-let and all secured lending on a home.

Will it be harder to get a mortgage in future?

Yes. The FSA proposal is to make the lender responsible for making sure the borrower can afford the loan.  If you have shall we say a ‘chequered past’ and a poor credit rating then it looks like it will be extremely difficult to locate a mortgage, so it will be important to keep your credit rating up to scratch if you can.

Does this mean the end of self-certificate mortgages?

The proposal will make lenders verify the income for all mortgage applications, so this in effect will spell the end of self-certification loans where the borrower simply states their income.

Is this not a good thing?

In some ways yes because it ensures the borrower can repay the loan. The problem is that it will have an impact on the self-employed who previously managed their mortgage repayments as they will have difficulty getting a replacement product or a new mortgage.

Will mortgages become more expensive?

It looks like it as any increase in regulation normally comes at a price and any higher costs for the lender will be passed on to the borrower.

Are there any limits on Loan to Values (LTVs) and income multiples?

Not yet, the regulator has decided not to impose any at this time but this issue can be reviewed in future.

Does this now mean that the ‘Buy to let’ and second charge lending is to be regulated?

It is now looking that way, more on this will be announced in January next year.

Are there any proposed changes in the way lenders deal with mortgage arrears of repossession?

More on this will be announced in January and will cover administration charges and early redemption charges on arrears fees, which should be to the borrower’s advantage.

The courts may also take a different view on repossession orders as the lender may be made more accountable for not ensuring that the loan was affordable.

The full proposals can be found under mortgage market review discussion paper.

DebtWizard comment

The measures proposed by the FSA are, in my view, long overdue and although they may be uncomfortable for some they are necessary in order to haul us back to sensible levels of manageable borrowing, otherwise we would just be on countdown for the next property crash.

Many thousands of consumers will experience difficulty when trying to re-mortgage if they have high Loan to Value, (LTV), as in future there will be limited products available to them. There is also real concern for thousands of people that have 'interest only' mortgages as they have no idea, beyond hoping house prices will rise, on how they will ever clear their mortgage.

Those consumers able to put down a healthy deposit however, should see no change.

Others will just not be able to get on that property ladder and for some this will not be a bad thing.  Over the past 15 years, morally and socially, through slick marketing and the easy availability of credit, we have been encouraged to spend now and pay later.  As a result we have developed a culture of ‘must have now’ which has sadly come home to roost with devastating consequences.

Much of the trouble we are now experiencing is as a result of people borrowing money for homes they could not afford from day one. Many gambled on the home increasing in value and some constantly re-mortgaged to clear credit cards debts, all in the hope that the house value would increase, seeing the home as their pot of gold, their pension.

One can only hope that this review will also eradicate the irresponsible lending practices seen especially in the ‘Buy to let’ market.

DebtWizard motto, ‘live your life within your means, not the lifestyle of your dreams'.