Tough new proposals to stamp out irresponsible mortgage lending have been unveiled by the Financial Services Authority in a bid to stop borrowers taking out unaffordable deals.
The proposals, which would come into force in 2013, would lead to one in 40 people currently with a mortgage being unable to qualify under the new rules.
But the FSA said it would introduce transitional arrangements, allowing unqualifying homeowners to remortgage as long as they have a good repayment history.
The key to the new proposals are what the FSA terms three main principles of good lending.
First is that lenders should assess affordability and only advance mortgages and loans where there is a reasonable expectation that the customer can repay without relying on uncertain future house price rises.
Secondly, lenders will have to “stress-test” loans and calculate if borrowers would still be able to afford them if interest rates rise.
Finally, the FSA said interest-only mortgages — which have forced many people into negative equity since the start of the recession and house price slump — should be assessed on a repayment basis.
FSA chairman Lord Turner said: “While the excesses of the pre-crisis period have largely disappeared from the current market, it is important to ensure that better practice endures in future when memories of the crisis recede and the dangers of poor practice return.”
The proposals were largely welcomed. Paul Smee, of the Council of Mortgage Lenders, said: “Rules need to be practical and avoid unintended consequences. The FSA's new proposals seem to strike broadly the right balance.”
Paul Broadhead, head of mortgage policy at the Building Societies Association, said: “This is good news for the self-employed, those in existing self-certified mortgages and people with negative equity. The new regulations appear to have struck a reasonable balance between allowing lenders flexibility when assessing affordability, while maintaining a sensible level of consumer protection.”
But Andrew Baddeley-Chappell of Nationwide said: “We question whether now is the right time to ask the industry to divert its focus on to further regulatory changes.”