MSE News: Risky lending targeted in tougher mortgage rules

Former_MSE_Guy

This is the discussion thread for the following MSE news story:

"A shake-up of the mortgage market was unveiled today, aiming to prevent a return of irresponsible lending ..."

Read the full story:
Risky lending targeted in tougher mortgage rules

jamesd

Seems to be a wording error there that will needlessly alarm prospective interest only borrowers. But note that I have not yet read the full paper, just the press release.

"Interest-only curbs. Borrowers will only be able to take out a deal where they initially pay the interest, and the loan itself at the end of the term, if they can afford equivalents payments on a standard repayment mortgage. In addition, they must demonstrate they are also saving to pay off the loan and not simply rely on rising house prices or an inheritance."

Which if accurate means that you're required to prove that you can repay the mortgage twice simultaneously, once for repayment and once for the repayment vehicle(s) you're using. The problem seems to be the choice of "In addition" wording which suggests that both the repayment basis and repayment vehicle are required, when in fact only one is needed. Replacing those words with "Alternatively" would seem to be accurate and in accord with the content of the FSA's announcement.

My comments based on the FSA's press release, which says:

"Interest-only mortgages should be assessed on a repayment basis unless there is a believable strategy for repaying out of capital resources that does not rely on the assumption that house prices will rise."

"Interest-only mortgages can still be offered as long as borrowers have a credible plan to repay the capital. But relying on hopes of rising property values is not enough;"

So that's just what was in earlier proposals: either have a repayment vehicle or be assessed on repayment basis. Provided the definition of repayment vehicle is reasonable that isn't too bad for many.

[STRIKE]However, it's potentially very detrimental for one group, those retiring early who want to repay their capital once their state pensions start. They may be banned from using interest only at the time when they are living on savings and investments before the state pensions, instead of being able to clear the mortgage over time when the state pensions cause their income to increase substantially.[/STRIKE]

Here's a link to the download page for the CP11/31: Mortgage Market Review: Proposed package of reforms for those who want to read it all.

jamesd

Having read the relevant parts of the paper, here's what it says for interest only mortgages:

1. If your repayment vehicle needs no additional funding to repay the mortgage you can be assessed on interest only basis with no requirement at all for any additional payments into a repayment vehicle to be included in the affordability test. (4.29, page 128)

2. If your repayment vehicle needs funding to meet the target the cost of the contributions to the repayment vehicle must be added to the cost of the interest for an affordability calculation. (4.27, page 128)

3. If you can't demonstrate a credible repayment vehicle you'll be assessed for affordability on repayment basis. (4.26, page 128)

Case 1 will apply to those with well funded repayment vehicles. For example, when I took out a mortgage as a first time buyer I was already roughly at the point where I could repay the mortgage immediately if I was willing to harm my financial interests by taking money out of ISAs. So I could have been assessed on the affordability of making only interest payments.

jamesd

There is some good news for younger first time buyers on repayment basis. The original proposals considered assessing affordability on a 25 year term. The new proposals allow longer terms that may get closer to the cost of an interest only mortgage and could make it easier to buy. (4.39, page 130) The bad news is that a possible plan to allow interest only without repayment vehicle for a while was dropped. (4.37, page 130)

nomoneytoday

How are the banks supposed to "win"..?
When they lend money they're moaned at for letting people have cash too easily, and when they don't they are accused of not lending enough..

ashleypride

nomoneytoday wrote: »

How are the banks supposed to "win"..?
When they lend money they're moaned at for letting people have cash too easily, and when they don't they are accused of not lending enough..

By managing the risk of default, and lending responsibly to people who can most likely afford it without requiring constant house pricing growth, and lending to people who can prove their income, not by offering 120% mortgages to people who make up an imaginary salary or who clearly cannot afford it.
The FSA rules are largely good, pity they are far too late in coming.

Wh05apk

To be honest these proposals are only what the lenders have been doing for the last few years, lenders have been working on "affordability" rather than income multiples, self cert mortgages have gone, only fast track exists, whereby the broker etc has to confirm income, and retain it, but not necessarily submit it. Lenders have cracked down on interest only, most now need to see an existing repayment vehicle or if low loan to value they may allow downsizing as an option.

As is usual with the FSA, they are 2-3 years behind the times here, lenders have amended their rules to better reflect the risks they are taking already.

The main area I see having an impact is the reduction in supposedly "non-advised" sales, this will mean that banks will have to accept responsibility for their frontline staff, who have effectively sold and advised on mortgages, but then submitting the app on a non-advised basis.

thomasdown

Wh05apk wrote: »

To be honest these proposals are only what the lenders have been doing for the last few years, lenders have been working on "affordability" rather than income multiples, self cert mortgages have gone, only fast track exists, whereby the broker etc has to confirm income, and retain it, but not necessarily submit it. Lenders have cracked down on interest only, most now need to see an existing repayment vehicle or if low loan to value they may allow downsizing as an option.

As is usual with the FSA, they are 2-3 years behind the times here, lenders have amended their rules to better reflect the risks they are taking already.

The main area I see having an impact is the reduction in supposedly "non-advised" sales, this will mean that banks will have to accept responsibility for their frontline staff, who have effectively sold and advised on mortgages, but then submitting the app on a non-advised basis.

Can't agree more, I was a 1st time buyer up until 4 months ago. Our mortgage is with HSBC and the mortgage guy at the branch we took our mortgage out with, would not even consider us for a mortgage before we had a financial report done. They take details about outgoings (loans, credit card debts, insurances etc) and then told us what they could lend. I don't know if other banks do this but HSBC were very professional. So you're right it does seem they are many years behind.

zagfles

Wh05apk wrote: »

The main area I see having an impact is the reduction in supposedly "non-advised" sales, this will mean that banks will have to accept responsibility for their frontline staff, who have effectively sold and advised on mortgages, but then submitting the app on a non-advised basis.

At least they're still allowing "pure" online sales on an execution only basis, but their rationale seems a bit odd - that hardly anybody would want to buy on that basis!

Thrugelmir

ashleypride wrote: »

The FSA rules are largely good, pity they are far too late in coming.

In essence financial common sense and good in terms of stopping the same issues arising in the future.

Thrugelmir

jamesd wrote: »

The bad news is that a possible plan to allow interest only without repayment vehicle for a while was dropped.

No sure why you view this as bad. There have been numerous attempts find a better way of repaying a mortgage for many many years than the traditional route. On the whole from the borrowers perspective this often ends in financial disaster. Mainly as the average borrower does not have the financial knowledge or discipline to meet the required objective.