FSA ends self-cert and fast-track mortgages
The regulator’s latest consultation on the MMR said a lender must verify income and be able to demonstrate that the mortgage is affordable taking into account the borrower’s net income and, as a minimum, both the borrower’s committed expenditure and basic household expenditure.
Outlining rules on affordability, the FSA said: “Lenders must obtain reliable evidence to confirm the income stated on the mortgage application form to ensure affordability assessments are based on fact.
“This will mean the end of self-certification mortgages, and also the end of ‘fast-tracked’ mortgages, an accelerated approval process under which verification of income may not be required at the lender’s discretion
“We stress here that we have no intention of preventing or making it more difficult for self-employed consumers or those with fixed term contracts, who can afford it, from getting a mortgage.
“As we explain, lenders have for many years underwritten mortgages for self-employed consumers by making an informed assessment of their circumstances, including their income, and there is no reason why this should not continue.”
The FSA also insisted the proposals would not harm the prospects of first time buyers.
It said: “Lenders typically take a more stringent approach to underwriting FTB applications and FTBs themselves are more cautious borrowers, with the vast majority taking out capital repayment mortgages and not relying on self-certification or interest-only mortgages.
“FTBs do typically take on higher LTV mortgages but our analysis shows that they have a better record of paying mortgages at high LTVs than any other borrower types.”
It said it did not see a case for loan to value restrictions either.
The City watchdog announced it was changing its proposed approach to assessing borrower income and expenditure, stating lenders would have freedom to decide how this is calculated.
As a minimum, it said lenders should take account of:
• The committed expenditure of the applicant, such as credit and other contractual commitments that will continue after the mortgage is entered into.
• The basic essential expenditure of the applicant’s household. This can be based on statistical or modelled data. It must cover the bare essential expenditure required to maintain the household’s basic needs and to live in the property which cannot be reduced, including heating, water, council tax and buildings insurance.
• The lender must also consider basic quality of living costs which are hard to reduce, such as clothing, household and personal goods, basic recreation, and childcare.
The FSA said unless a mortgage is fixed rate is fixed for five years or more, lenders must undertake stress-testing of interest rates with reference to market expectations over the next five years. It said they must be able to justify the stress test applied by reference to an independent published source of market expectations, such as the forward sterling rate published on the Bank of England’s website.