At the core of these changes are three principles of what the Financial Services Authority deems good mortgage underwriting:
• Mortgages and loans should only be advanced where there is a reasonable expectation that the customer can repay without relying on uncertain future house price rises
• The affordability assessment should allow for the possibility that interest rates might rise in future; borrowers should not enter contracts which are only affordable on the assumption that low initial interest rates will last forever
• Interest-only mortgages should be assessed on a repayment basis unless there is a believable strategy for repaying out of capital resources that does not rely on the assumption that house prices will rise – findings from an extensive review on interest only are due out in 2013
Key features of Mortgage Market Review changes to the industry include:
• Income will have to be verified in every mortgage application, for which lenders will be responsible
• Lenders do not have to consider in detail what borrowers spend but cannot ignore unavoidable bills, such as heating and council tax
• Interest-only mortgages can still be offered as long as borrowers have a credible plan to repay the capital. Relying on hopes of rising property values is not enough
• Lenders will have to consider the impact of increases in interest rates in line with current market expectations
Other changes will include intermediaries no longer being required to assess affordability, alternations to disclosure and arrears management.
The most significant changes for the industry (both lenders and intermediaries) are the advice rules. Much of the early focus has been on execution-only, but this should not overshadow the changes to the advice process itself.
This guide will cover how the mortgage advice market will change post-MMR and how advisers will have to adapt their services.
Supporting material was provided by Jane King, principal of Ash-Ridge Asset Management; Diane Weitz, director of Ashlea Financial Planning; and David Finlay, chairman of the Intermediary Mortgage Lenders Association.