FSA announced further restrictions on mortgage lending
At the end of October, the FSA announced further restrictions on mortgage lending, which will take effect in April 2014. For potential homeowners and existing homeowners alike, this is further discouraging news at a time when lending restrictions need to loosen if we want to see a return to a more robust property market.
The restrictions primarily target the offering of interest-only loans and certain other less-than-scrupulous lending practices. Beginning in 2014, lenders must take into consideration a borrower’s income, outflows and whether or not he or she has a sound repayment plan. Keep in mind that under an interest-only loan, borrowers make the repayment at the end of the loan term. Most borrowers using this product count on rising sales prices to secure the repayment. This is a problem for many borrowers whose interest-only loans are coming due within the next decade.
A second provision prevents lenders from taking advantage of borrowers who cannot secure financing elsewhere by offering less favourable terms, such as higher rates or different terms. On their face, both of these provisions seem smart, geared to protect the borrower and prevent another economic collapse.
Unfortunately, increased restrictions serve to constrict an already troubled market. Whilst the regulations generally target interest-only loans, the effects will be widespread. This is particularly unwelcome to first-time buyers struggling to save for a deposit. Lacking a past mortgage payment history and representing a potentially riskier investment for lenders, young people will find it even harder to take their first step onto the property ladder.
Current mortgage holders are affected as well. As many as nine million UK households will may become trapped into unfavourable mortgage terms. The FSA altered the provision to allow lenders to waive the rules for existing borrowers, provided the new mortgage was for the same or lesser amount, and the borrow had a good repayment history. However, this is hardly sufficient to alleviate the problems the new regulations will bring.
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