New mortgage rules could slow real estate recovery and make it harder for property owners to re-mortgage, it is claimed

Irresponsible lending practices that saw property owners obtaining mortgages without proof of income would be outlawed and spending habits rigorously vetted by lenders in future if new proposals get the go ahead.

New rules outlined by the Financial Services Authority, the UK’s financial regulator, would see self certified mortgages banned in a bid to make the whole mortgage market more rigorous.

Banks and building societies would have to assess all mortgage applications on the basis of a customers ‘free disposable income, which would mean those seeking loans would have to account for how they spend their income on items such as alcohol, tobacco, clothing, shoes and eating out as well as taxes and debt.

Experts are warning, however, that the proposals would make it harder for property owners to re-mortgage and slow the real estate recovery.

‘If the FSA tightens up on what lenders are allowed to do, people could well be pushed over the edge. This could cause consumer detriment. Bringing in too strict rules on affordability is going to be a real problem,’ said Ray Boulger of mortgage broker John Charcol,  ‘The overall impact will be to reduce the amount of mortgage finance and slow any recovery in house prices,’ added Boulger.

Vince Cable, Liberal Democrat Treasury spokesman, said there needed to be a distinction between existing mortgage holders struggling to renew who clearly need help and those chasing new mortgages.

The FSA denied though that its new rules will necessarily make it harder for those wishing to re-mortgage. ‘I’m not sure it will be the case that a lot of people will struggle to remortgage,’ said Jon Pain, FSA managing director of supervision.

‘The mortgage market has seen extraordinary upheaval over the last 18 months and whilst it has worked well for the vast majority of borrowers, some have suffered great financial distress. We recognise that we need to bring about a step change in regulation and we need to act now,’ he added.

He explained that the kind of irresponsible lending practices seen in the market until recently had to be stopped and the aim was to ‘dampen down some of the froth’ in the market. ‘If that produces a more stable market, that would be good,’ he added.

The proposals are contained in a discussion paper that is open for consultation until 30 January 2010 and the FSA will be actively seeking views from consumer groups and the industry.


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