Just before Christmas the Financial Services Authority published its fund consultation paper for the Mortgage Market Review. This document if fully implemented in 2013 will directly influence the mortgage market for many years to come. Essentially the paper published is the regulators reaction to the recent financial crisis. They are attempting to regulate the mortgage market better as this market was seen as one of the factors causing the crises.
The key proposals are that lenders should allow for the possibility that interest rates might rise in the future when accessing affordability. Also interest only should be accessed on a repayment basis in most cases, unless there is a believable strategy for repaying the mortgage out of capital resources. This does not include relying on the assumption that house prices will rise and people will sell and downsize to a smaller property. These two proposals will probably affect first time buyers the most who are struggling to renter the housing market. They are more likely to just fall short of getting a mortgage if the barriers regarding affordability are raised and interest only loans are effectively withdrawn. In the past interest only loans have been useful for first time buyers who may require low payments early on in the mortgage. For example for the first couple of years as they furnish their house and generally income increases, but sadly this facility will no longer be available.
The paper also stresses that income will have to be verified in every mortgage. This statement will finally sound the death knell for self cert mortgages and its junior partner, the fast track mortgage. Both these mortgages did not need evidence of income supplied to the lender. The change in lending in this area will affect mainly the self employed who have not been in business that long and cannot supply two or three years accounts that are required for mainstream lending. Also it could affect some employed people who consistently earn significantly above their basic wage by way of bonuses or overtime, but would struggle to get their extra earnings to be verified as guaranteed if an income reference was sent to the employer.
Finally the regulator is asking lenders to consider what borrowers spend on heating and council tax. In theory this could impact on people with large older properties or properties in the country who may have to use oil central heating. Again, in some circumstances extra spending above the average could affect the mortgage advance. With regard to outgoings the regulator appears to be particularly interested in debt consolidation for credit impaired customers. They are saying they will assume that the debts will remain outstanding by including them as committed expenditure or the debts will have to be repaid directly to the creditors. This could cause problems effectively increasing the cost of processing the mortgage and it may further deter lenders in the mainstream and credit impaired markets from doing significant consolidation. When I first entered the industry in the 1970s most lenders did not consolidate, they only lent further for home improvements. The recent behaviour of lenders restricting the amount of consolidation is leading me to believe that we could be returning to 1970s lending.
The affect on the markets, the regulator is aware, is going to be significant. It is estimated that 17% of mortgages in the boom years would not have been granted if there proposals are adopted, and going forward they feel that form 2014-2023 house price growth will fall form 34% to 23% as a result of these proposals. In summary although the housing market is tough and likely to remain tough into the medium term, I do feel that long term houses remain a buy so long as you are prepared to drive a hard bargain.
Kieron Bassett Financial Services have two Independent Financial Advisers who specialise in mortgages. Contact us on (01524) 832057, via e-mail, info@kieronbassett.com, or visit www.kieronbassett.com.
Kieron Bassett DipPFS
6th February 2012
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