How will mortgage reform affect you?

Mortgage file

All mortgage borrowers will have to undertake affordability tests, meaning the end of so-called self-certification mortgages, under new plans announced this week.

The Financial Services Authority (FSA) has unveiled plans for a major reform of the mortgage market, which it says will ensure better protection for consumers against “financial distress”.

The FSA had been expected to also announce restrictions on how much banks and building societies can lend to customers based on loan-to-value, loan-to-income and debt-to-income multiples. While this has not been forthcoming, the FSA says it has not ruled out taking such action in the future.

In the immediate term, the regulator wants to ban so-called self-cert mortgages by forcing lenders to check all borrowers’ income, including the self-employed. “Toxic” products – such as mortgages designed for people with small deposits and a bad credit history – will also be scrapped under the plans.

In order to protect struggling borrowers from racking up even bigger debts, the FSA says lenders must not levy arrears charges on homeowners who are repaying loans. Firms, it says, should not be able to profit from people who have missed payments.

The FSA wants lenders to take responsibility for ensuring borrowers are able to cope with the cost of home loans, which will include compulsory affordability tests for all mortgages.

Finally, the FSA is looking at bringing buy-to-let mortgages and secured loans under its regulatory remit.

Jon Pain, managing director of supervision at the FSA, says: “The mortgage market has seen extraordinary upheaval over the last 18 months and while it has worked well for the vast majority of borrowers, some have suffered great financial distress.”

The FSA’s review of the mortgage market found a “rapid explosion” of mortgage products, including high-risk lending strategies and relaxed credit standards. There was a “mutual assumption by too many borrowers and lenders that the good times could not end” says Pain – an assumption that has since proved to be flawed.

“The FSA needs to ensure that firms only lend to people who can afford to pay the money back,” he adds. “The reforms that we have announced today will ensure that the mortgage market works better for consumers and that it is sustainable for firms.”

The FSA will now consult on the proposals until 30 January 2010 and publish feedback in March, before phasing in the new rules.

What do the new rules mean for you?

The FSA’s proposed changes have been met with a mixed reaction - including concerns that they could damage further the already weak mortgage market and make it harder for borrowers to get loans.

“It is ironic that at the same time as politicians are seeking to encourage lenders to increase their flow of mortgage lending to consumers, they are also keen to take steps to address the perception of ‘irresponsible lending’,” the Council of Mortgage Lenders said in a statement.

Paul Broadhead, head of mortgage policy at the Building Societies Association, adds: “The vast majority of the British population aspire to home ownership and these proposals must not frustrate the sensible ambitions of potential homeowners."

The biggest change affecting most people will be tougher affordability tests. Currently, some lenders still use income multiples to calculate how much they will lend to people, although most look at a borrower's overall ability to afford a loan.

This means taking into account borrowers' committed expenditure - from income tax and utility bills to childcare costs and debt repayments. The FSA, however, also wants lenders to look at borrowers' 'personal expenditure', perhaps by scrutinising bank statements to see how much is spent, and where.

David Hollingworth, mortgage expert at London & Country, believes taking such factors into account is a step too far: "Your spending changes when you buy a house, so looking at discretionary spending doesn't give an accurate picture. Plus, this suggests the FSA wants lenders to 'nanny' borrowers - a fact many people won't like."

Committed expenditure Personal expenditure
Income tax and national insurance Food and drink
Secured and unsecured debt repayments Alcohol and tobacco

Pension contributions

Clothing and footwear
Insurance premiums Household goods and services
Utility bills and TV license Health and personal care
Council tax Transport
Service charge or land rent - or shared
ownership rent
Childcare costs and school or university fees Holidays
Regular savings Hotels
Source: FSA Mortgage Market Review (October 2009)

The end of self-certification mortgages could cause problems for self-employed people, who aren't always able to prove their exact annual income.

Hannah-Mercedes Skenfield, mortgages channel manager at, says these loans can put homeowners at risk of borrowing more money than they are able to repay.

"By the very nature of their income, people requiring self-certification mortgages are a riskier bet, and have been known to default more frequently," she adds. "Self-employed people looking for a mortgage should make sure they have clear documentation to prove their income levels."

In fact, self-certification mortgages have all but died out during the credit crunch with just one lender currently offering a deal, according to Hollingworth.

There is nothing to stop someone who is self-employed from buying a property using a standard mortgage, with income normally verified using their accounts from the past two or three years.

"The FSA has said that it can't see why anyone won't be able to verify their income," says Hollingworth. "However, a number of self-employed people will struggle to get on the property ladder - which is exactly why self-certification mortgages were introduced in the first place."

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