• Mortgages and loans should only be advanced where there is a reasonable expectation that the customer can repay without relying on uncertain future house price rises. Lenders should assess affordability.
• This affordability assessment should allow for the possibility that interest rates might rise in future: borrowers should not enter contracts which are only affordable on the assumption that low initial interest rates will last forever.
• Interest-only mortgages should be assessed on a repayment basis unless there is a believable strategy for repaying out of capital resources that do not rely on the assumption that house prices will rise.

At the core of the responsible lending proposals is the principle of affordability, rather than relying to a significant extent on the underlying collateral and the assumption that property prices appreciate. This principle has three key elements:

• The affordability assessment: a lender must verify income and be able to demonstrate that the mortgage is affordable taking into account the borrower’s net income and, as a minimum, both the borrower’s committed expenditure (which includes the mortgage payments) and basic household expenditure.
• The interest rate stress test: the lender must also take account of the impact on mortgage payments of market expectations of future interest rate increases.
• The interest-only proposals: the lender must also assess affordability on a capital and interest basis, unless there is a clearly understood and believable alternative source of capital repayment.