Financial Services Authority (UK) Confirms New Rules for the Mortgage Market

Date Published 10/28/2012
Author Marja Hoek-Smit
Country United Kingdom

October 25, 2012

The Financial Services Authority (FSA) has published new rules that put common sense at the heart of the mortgage market and will prevent future borrowers ending up with a mortgage they cannot afford.

The new rules, the outcome of the FSA’s Mortgage Market Review (MMR), will come into effect on 26 April 2014.  One measure will be activated immediately to help borrowers who might be trapped by today’s tighter lending criteria.

The majority of proposals published in December 2011 are unchanged. Therefore, for all mortgages, lenders will need to consider a borrower’s net income, and committed and basic essential expenditure. Interest-only mortgages can be offered to anybody who shows they have a credible repayment strategy - but relying on rising house prices will not be enough. All mortgages lenders will also have to take into account the impact that future interest rate rises may have on mortgage repayment costs.

For all but the most straightforward transactions, most customers who are sold a mortgage on an interactive basis, i.e. face to face or over the phone, will need to be advised, meaning that they will only be recommended a mortgage that is suitable for their circumstances. The process will be more straightforward for mortgage professionals, high net worth individuals and business customers who can opt out of receiving advice.

In light of feedback received during the consultation, the FSA has re-thought its approach on a number of areas. The main changes to the MMR are therefore as follows:

  • Transitional rules (affecting borrowers sometimes referred to as ‘mortgage prisoners’) - enabling lenders to make exceptions to the responsible lending rules for customers who need to remortgage, providing there is no increase in the outstanding amount to be repaid.
  • Advised sales - clarifying that while most sales will have to be advised, advice will not be needed for simple contract variations - providing there is no increase in the amount to be repaid.
  • High net worth borrowers, and business customers borrowing against their home – confirming that these types of customers require a tailored approach. This will allow opting out of receiving advice and involve a less stringent affordability check because of their different characteristics and circumstances as compared with most other borrowers.
The effects of the new rules on different types of borrower are as follows:

  • All customers - all customers will need to satisfy lenders that they can afford the mortgage, and provide evidence of their income. Most mortgage sales will require advice, particularly interactive sales (such as face-to-face or telephone sales).  The new rules do not prevent higher loan-to-value lending, and interest-only will be allowed if the borrower can show that they have a credible repayment strategy.
  • First time buyers - the new rules do not prevent higher loan to value mortgages being offered.
  • Existing borrowers that cannot meet the new affordability requirements - lenderscan ‘switch off’ the affordability and interest-only requirements for existing borrowers who want to get a new mortgage for the same amount or less. While any lending decision is a commercial one, lenders will also be able to use these arrangements to take on the customers of other lenders.  Lenders will, with immediate effect, be prevented from treating these customers less favourably than other customers.
  • Older consumers - the new rules do not apply any age limits or prevent lending to older consumers, including beyond retirement.
  • Self-employed - the new rules give lenders flexibility to decide what type of evidence of income to accept from self-employed customers.
  • Entrepreneurs (i.e. business people borrowing against their homes) - a flexible approach applies and these borrowers will be able to secure a mortgage on an execution-only basis providing they confirm they are happy to ‘opt out’ of the suitability tests. Lenders must see a credible business plan before providing a mortgage.
  • Right-to-buy - customers who are exercising their right-to-buy will always be required to get mortgage advice.
  • Shared equity - customers who are also getting a second charge shared equity loanto assist in their property purchase will need to be able to afford the payments on the shared equity loan as well as their mortgage.
  • Credit-impaired borrowers - our rules do not prevent customers with an impaired credit history from getting a mortgage, as long as they can afford it. Where they are consolidating debt they must get advice.
  • High net worth customers - a flexible approach applies and these borrowers will be able to secure a mortgage on an execution-only basis providing they confirm they are happy to ‘opt out’ of the suitability tests. 

Separate to these changes, the FSA is carrying out an analysis of existing interest-only borrowers to see how many may be unable to repay the capital and understand what steps lenders are taking to address this issue. The FSA expects to publish the findings of this piece of work in the first quarter of 2013.

Notes for editors
    1) The new rules and feedback to CP 11/31 can be found in Policy Statement 12/16.
    2) A summary of all the reforms is outlined on page 11 of the Policy Statement.
    3) A high net worth customer is defined as a person with a minimum annual net income of £300,000, or minimum net assets of £3m.
    4) The measure being activated immediately is MCOB 11.8.1E. This will protect existing borrowers who find themselves unable to remortgage (whatever the reason), and prevents lenders from taking advantage of the customer’s situation, or treating them less favourably than other similar customers, for example by offering less favourable interest rates or other terms.
    5) Implementation of the Approved Persons regime for mortgage advisers is currently on hold until the FCA has been established. The FCA will introduce the changes as soon as practically possible and, in doing so, will make sure that firms have enough time to make the necessary arrangements.
    6) The MMR began in autumn 2009 with a Discussion Paper. Other earlier MMR documents.
    7) The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; securing the appropriate degree of protection for consumers; fighting financial crime; and contributing to the protection and enhancement of the stability of the UK financial system.
    8)The FSA will be replaced by the Financial Conduct Authority and Prudential Regulation Authority in 2013. The Financial Services Bill currently undergoing parliamentary scrutiny is expected to receive Royal Assent in late 2012 or early 2013, subject to the parliamentary timetable.

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