It has been predicted by Knight Frank the estate agents that UK house prices are unlikely to hit 2007 levels again in real terms until 2031. Although housing transactions levels have halved since 2007 they do see a slow recovery beginning in 2014, but they predict the recovery will be the slowest housing market recovery on record.
The beginning of this recovery, predicted in 2014, fits into new mortgage rules from the Financial Service Authority that will take effect on 26 April 2014. The aim of these rules is to hard wire common sense into the mortgage market, and to put advice at the heart of the mortgage process. This will hopefully ensure a satisfactory outcome for the customer.
These rules have taken a long time to formulate with the consultation period having started soon after the banking crash. The rules centre around affordability, in that the lender will have to verify income in all cases, with the level of equity not to form the basis of affordability assessments. For example, in the past lenders have often allowed people to borrow higher income multiples, because they are well covered by the equity in the property, but now this practice is likely to stop. Also, interest rate stress tests will take place to assess affordability, protecting against future interest rate rises over a minimum of a 5 year period. Lenders who are lending to credit impaired borrowers who are consolidating debt will be required to either assume the debts will remain outstanding by including them as committed expenditure, thus giving them less ability to borrow, or ensure they pay the debts off directly as the mortgage completes.
Interest only mortgages will also be subject to new rules in 2014 and all applications must be accompanied by a creditable repayment strategy, with basically affordability of the loan determined as if the customer is taking out a repayment plan. The lender will be required to carry out at least one review of the payment strategy during the term, although FSA are keen to point out that the outstanding balance remains the borrowers’ responsibility.
Finally the FSA has approached lending into retirement by changing the definition of retirement from the state pension age to the consumers retirement age, and then taking into account pensions if the mortgage runs into retirement. They are asking lenders to take a prudent and proportional approach to lending in this area.
Overall, I believe these new rules could gently move the market forward in 2014 as there are some positive features in the new rules. For example, the affordability stress test that takes potential interest rate rises into account over the first 5 years of a mortgage could prove to be a very valuable tool for borrowers. As a result of this exercise they may opt for 5 year fixed rates that can combine certainty of payment for the individual, whilst bringing stability to the market generally. Also, the need for lenders to have to check on interest only mortgages that the repayment vehicle to pay the loan off is on target would add to their costs. This would make this type of mortgage more expensive and it could stop them eventually offering this type of loan. Generally I think that interest only mortgages have led to some of the problems that we find ourselves in and their demise would not be such a bad thing. Finally, I think that some flexibility around retirement age and a more common sense approach to lending in this area will benefit the market generally, as many people I come across can afford mortgages in retirement but are unable to borrow due to ultra strict criteria.
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
12th November 2012
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