Although the European Union plans to draft new proposals on responsible lending and borrowing at the end of the year, the Financial Services Authority is pressing ahead with its plans now. It feels that any delay would be to the deterrent of the market.
The FSA proposals appear to centre on mortgage affordability that will stress-test the ability of the mortgage holder to make payments if interest rates rose a number of times. They have indicated that as impaired credit borrowers would present the highest risk of arrears, affordability check for these would incorporate an additional disposable income buffer. With regard to monthly expenditure it looks like they may be advocating statistical data and expenditure models to calculate general household outgoings. The FSA has commented that they plan to ban self-cert mortgages, and they want to make sure that if a borrower has an interest only mortgage that they have a suitable savings plan for repaying the capital element of the mortgage. They have also indicated that it is the lenders responsibility for monitoring that the borrowers do this.
I believe that as a result of the FSA’s Mortgage Market Review, there have been significant changes in the Banks and Building Societies behaviour, in that they have become more cautious and restrictive. For example, a number of lenders would lend to borrowers after age 75, whereas now these lenders want mortgages paid off before this age. Also, some lenders in the recent past have been sympathetic to mortgage applicants who have had a minor credit issue, but now I find they are unable to lend.
Although the two areas of borrowing mentioned above are important examples of restrictive lending in the market, they are not mainstream events. However, the measures with regard to affordability and interest only are likely to affect the market significantly. I think that it is possible that the stress-testing of affordability could go too far with lenders effectively dropping the level of income multiples to very low levels. In addition, the borrower that has had a previously impaired credit rating may find it extremely difficult to either enter or stay in the market, as an additional income buffer is required. The use of statistical data and expenditure models could further impact on borrowing for some who may have fairly frugal lifestyles, which would allow them to borrow more when affordability was assessed individually.
With regard to interest only mortgages, many lenders have recently made adjustments to their policies to effectively exclude this as an option. The reason for this is centred around the FSA asking the lender to make sure the borrower has a suitable repayment vehicle in place, and checking this plan possibly annually, to make sure it is on target. Clearly this responsibility and the costs involved in checking are likely to lead to the demise of the interest only mortgage. For many, and in particular buy-to-let borrowers, the potential abolition of interest only mortgages could have a detrimental effect on the market. As for many buy-to-let investors, only interest only payments make sense, as a move to repayment could make it unaffordable.
In summary, I believe the direction the market appears to be taking as a result of the mortgage market review, coupled with the Banks capital adequacy requirements will have placed a brake on the housing market. I believe the market will remain very quiet for the foreseeable future with possible falls in value as some find it difficult to raise finance. However, on the flipside for existing borrowers, I feel that interest rates will remain low for the foreseeable future, as I think the potential mortgage famine will contribute to taking us further towards a double dip in the economy. Therefore, The Bank of England will be reluctant to raise interest rates in this austere environment.
If house prices do fall, it may be worthwhile for people thinking of remortgaging to do so sooner rather than later, as reductions in the equity in your house could make it more difficult to secure a good deal in the future. It is worth contacting an Independent Financial Adviser who specialises in mortgages to help you obtain the mortgage that is most suited to your needs. Kieron Bassett Financial Services has two Independent Financial Advisers. Contact us on (01524) 832057, via e-mail, info@kieronbassett.com, or log onto www.kieronbassett.com.
Kieron Bassett CertPFS