A report from Times Online has revealed that the Financial Services Authority (FSA) has made a dramatic review of the mortgage market, with recommendations that mortgage lenders conduct much more rigorous examinations of potential home buyers? finances before approving them for a new mortgage.
The FSA said that lenders should closely investigate homebuyers? personal spending, especially for alcohol and tobacco. A new ?affordability test? could also be adopted across the board so that other spending ? such as on clothing, shoes and childcare costs ? would also be assessed.
Up to now, there has been no standard procedure for assessing the ability of mortgage applicants to repay their loan. Each mortgage lender has their own set of practices.
The FSA said in its document: ?There is clearly a responsibility on all lenders to extend credit only where a consumer can afford it and, in our view, a robust assessment of both income and expenditure is key to ensuring affordable mortgages. We propose to require all lenders to assess the level of a consumer?s expenditure in determining the affordability of a mortgage product, to ensure that lending decisions are based on a consumer?s free disposable income.?
The FSA admitted some flaws in the new plans as mortgage applicants could well underestimate their spending and may fail ?to incorporate past experiences into their budgeting?.
The new proposals are designed to address the growing financial crisis where mortgage customers have taken on too much and consequently fallen into arrears or into negative equity. A further proposal from the FSA is that it should begin to regulate mortgages for landlords.
There is also a proposal to ban self-certified mortgages which have been dubbed ?liars? loans?. This type of mortgage is aimed at the self employed with irregular earnings and therefore do not ask for proof of income.
