If the Financial Service Authority has its way, lenders will carry out affordable checks on all potential borrowers before to sell a mortgage. In order to ensure responsible lending, the FSA wants the tests for all mortgages. The city watchdog is planning to ban effectively fast-track mortgages and self-certification.
The FSA will require to all borrowers to produce evidence of their income from an independent source. However, the regulator did not give details about the affordability criteria that the lenders should use, saying that they can use their own models of expenditure, or their statistical data. The lenders would decide to carry out a detailed evaluation of a borrower’s outgoing.
However, the lenders must base affordability on a repayment mortgage instead of basing it on interest-only one. In addition, affordability should take account of future rise of interest rate and the lenders should base it on a twenty-five years mortgage term even if the borrower took the loan on a longer term.
The Financial Service Authority added that lenders advancing cash to borrowers with poor credit histories must apply a stricter test of affordability and make sure that the borrowers have a buffer between their outgoings and income. This is because research revealed that these borrowers have often difficulties to repay their loan.
However, the regulator made it clear that there will not be restrictions on borrowers applying for loan that mixed factors of high risk such as borrowing a high part of their properties value with a high multiple income. This is because these borrowers usually do not have poor credit histories.
According to the city watchdog, it proposal of verifying income should not exclude self-employed borrowers only if their businesses are recent. The FSA carried out a research on 9,000 borrowers between 2005 and 2008. The result was that 46% of them did not have any money left after repaying their loan and dealing with their domestic expenses. Two third of them had additional debts such as loans or credit cards besides their mortgage.
According to the FSA director, Lesley Titcomb, responsible for the mortgage market, there is a clear link between mortgage arrears and financial overstretch. In order to protect vulnerable consumers, the FSA ensures that every borrower is able to pay back the mortgage.
The regulator estimates that its new tests of affordability will add some days to the length of time it requires to apply for a loan and the tests will add between £3 and £18 to the mortgage transaction cost.