Financial Services Authority (FSA) of UK has outlined new proposals to make sure borrowers can afford the mortgage payments. The proposed changes are aimed at ensuring all lenders get back to the basics of responsible lending and to prevent the problems before they develop or get out of control.
According to the FSA, the proposals include imposing affordability tests for all mortgages and making lenders ultimately responsible for assessing a consumer’s ability to pay; requiring verification of borrowers’ income in every case to prevent over inflation of income and to prevent mortgage fraud and extra protection for vulnerable customers with a credit-impaired history.
FSA said that the proposals, published in the consultation paper, form part of its major review into the UK mortgage market and are based on detailed analysis of past lending decisions, looking at the causes of arrears and repossessions since 2005.
The findings of the FSA are: 46% of households either had no money left, or had a shortfall after mortgage payments and living costs were deducted from their income and almost half of new mortgages between 2007 and the first quarter of 2010 were provided without a customer having to verify their income.
It has observed that the share of interest-only mortgages has been increasing. At the peak of the market, over 30% of all mortgages were interest-only; many consumers with no repayment vehicle count on future house price rises or uncertain life events to repay their mortgage and some have no plan at all and borrowers with a credit-impaired history are particularly vulnerable.
FSA added that the mortgage rules require arrears charges to be based on a reasonable estimate of the cost of the additional administration required as a result of the customer being in arrears.
Lesley Titcomb, director responsible for the mortgage market at FSA, said: “There is a clear link between financial overstretch and mortgage arrears and repossessions, and we are determined to protect vulnerable consumers by making sure that everyone who takes on a mortgage can afford to pay it back.
“While it is clear the mortgage market has worked well for many, we need to build a strong new framework to protect mortgage customers and to ensure that the problems we have seen in the past do not happen again, particularly as the mortgage market recovers.”