After a lengthy consultation process the Financial Services Authority (FSA) has today published the final rules of the Mortgage Market Review (MMR). These rules will come into effect in April 2014 and are designed to set the ground rules for mortgage lending not just now but going forward.
The key aspects that they cover are as follows:
This is at the core of the MMR and requires lenders to carry out a robust assessment to ensure that a mortgage will be affordable now and in the future. That means that lenders will not apply a one size fits all income multiple and will need to look closely at other expenditure. That is why elements such as childcare costs have become a feature of lender affordability checks.
Borrowers will have to verify their income in every case which closes the door on any return for self certification mortgages or to fast track mortgages where borrowers did not have to prove their income.
Interest only is allowed as long as lenders seek to confirm that there is a credible repayment plan in place. A reliance on rising house prices will not pass muster to prevent borrowers reaching the end of their mortgage term only to find that they can’t repay the mortgage.
This recognises that the toughening in lending criteria will leave some borrowers trapped as mortgage prisoners with few or no options open to them. This allows lenders to lend even where borrowers would not meet the new, tougher affordability criteria as long as there is no additional borrowing. For example those porting their mortgage to a new home and not requiring any more borrowing will now be able to do so even if they do not meet the lenders current, tighter criteria.
Lending into Retirement
The rules do not prevent lenders lending to borrowers beyond a specific age and mortgages can be taken into retirement as long as they are affordable.
A positive aspect of the rules is to move toward a requirement for advised mortgage sales. Many lenders will not offer advice and just give information on their own products. Although there will still be some sales that do not need to be advised any interaction that leads a borrower toward a particular product should be on an advised basis.
This will help prevent situations where borrowers feel that they have received advice when really they have only been talked through a decision tree process with information provided.
So what impact will MMR have for borrowers?
The reality is that there are few surprises in the rules and there will be very little discernible impact on borrowers, as the market has already tightened. Lenders have already employed tougher criteria much of which has been in anticipation of these new rules.
For example interest only lending is much harder to come by as lenders have limited the maximum LTV. It has fast become a niche product and in some extremes lenders such as Nationwide and Co-operative Bank have stopped offering interest only altogether.
Older borrowers have also found criteria tougher with most lenders only offering mortgages to a maximum age of 70 or 75. The fact that the regulator has not put a maximum age does not necessarily mean that lenders will respond by loosening criteria.
So in many ways we are already in a market operating under the rules that the MMR will implement in 2014. The rules are there to set a framework to ensure that when we do see some improvement in the market lenders cannot rapidly loosen criteria in a bid to chase bigger volumes, ultimately avoiding a return to the excesses at the peak of the market.