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On 25th October 2012, following a three-year Mortgage Market Review the FSA published their new rules (PS12/16). The aim of the review was to implement changes to create a mortgage market that worked better for consumers and that is sustainable for all participants. Throughout the consultation process TCFInfo has offered users the opportunity to ‘join the debate’ through our regular industry surveys. In total we delivered the collective results of 2697 questionnaires to the FSA on their proposals and this feeback was recognised in the paper they published. Links to 1-page guides on the FSA’s initial proposals and details of the full survey results are at the bottom of the page.
The new rules will come into effect on 26 April 2014, except for one relating to MCOB 11.8.1E which has been activated immediately. This will protect existing borrowers who find themselves unable to remortgage (whatever the reason), and prevents lenders from taking advantage of the customer’s situation, or treating them less favourably than other similar customers, for example by offering less favourable interest rates or other terms.
The majority of proposals published in December 2011 are unchanged therefore, with all mortgages:
- Lenders will need to consider a borrower’s net income together with their committed and basic essential expenditure. Interest-only mortgages can be offered to anybody who shows they have a credible repayment strategy - but relying on rising house prices will not be enough.
- Lenders will have to take into account the impact that future interest rate rises may have on mortgage repayment costs.
- All but the most straightforward transactions, most customers who are sold a mortgage on an interactive basis, i.e. face to face or over the phone, will need to be advised, meaning that they will only be recommended a mortgage that is suitable for their circumstances. The process will be more straightforward for mortgage professionals, high net worth individuals and business customers who can opt out of receiving advice.
In light of feedback received during the consultation, the FSA has re-thought its approach on a number of areas. The main changes to the MMR are therefore as follows:
- Transitional rules (affecting borrowers sometimes referred to as 'mortgage prisoners') - enabling lenders to make exceptions to the responsible lending rules for customers who need to remortgage, providing there is no increase in the outstanding amount to be repaid.
- Advised sales - clarifying that while most sales will have to be advised, advice will not be needed for simple contract variations - providing there is no increase in the amount to be repaid.
- High net worth borrowers, (A high net worth customer is defined as a person with a minimum annual net income of £300,000, or minimum net assets of £3m) and business customers borrowing against their home – confirming that these types of customers require a tailored approach. This will allow opting out of receiving advice and involve a less stringent affordability check because of their different characteristics and circumstances as compared with most other borrowers.
The effects of the new rules on different types of borrower are as follows:
- All customers - all customers will need to satisfy lenders that they can afford the mortgage, and provide evidence of their income. Most mortgage sales will require advice, particularly interactive sales (such as face-to-face or telephone sales). The new rules do not prevent higher loan-to-value lending, and interest-only will be allowed if the borrower can show that they have a credible repayment strategy.
- First time buyers - the new rules do not prevent higher loan to value mortgages being offered.
- Existing borrowers that cannot meet the new affordability requirements - lenders can ‘switch off’ the affordability and interest-only requirements for existing borrowers who want to get a new mortgage for the same amount or less. While any lending decision is a commercial one, lenders will also be able to use these arrangements to take on the customers of other lenders. Lenders will, with immediate effect, be prevented from treating these customers less favourably than other customers.
- Older consumers - the new rules do not apply any age limits or prevent lending to older consumers, including beyond retirement.
- Self-employed - the new rules give lenders flexibility to decide what type of evidence of income to accept from self-employed customers.
- Entrepreneurs (i.e. business people borrowing against their homes) - a flexible approach applies and these borrowers will be able to secure a mortgage on an execution-only basis providing they confirm they are happy to ‘opt out’ of the suitability tests. Lenders must see a credible business plan before providing a mortgage.
- Right-to-buy - customers who are exercising their right-to-buy will always be required to get mortgage advice.
- Shared equity - customers who are also getting a second charge shared equity loan to assist in their property purchase will need to be able to afford the payments on the shared equity loan as well as their mortgage.
- Credit-impaired borrowers - our rules do not prevent customers with an impaired credit history from getting a mortgage, as long as they can afford it. Where they are consolidating debt they must get advice.
- High net worth customers - a flexible approach applies and these borrowers will be able to secure a mortgage on an execution-only basis providing they confirm they are happy to ‘opt out’ of the suitability tests.
Separate to these changes, the FSA is carrying out an analysis of existing interest-only borrowers to see how many may be unable to repay the capital and understand what steps lenders are taking to address this issue. The FSA expects to publish the findings of this piece of work in the first quarter of 2013.
The Financial Services Bill currently undergoing parliamentary scrutiny is expected to receive Royal Assent in late 2012 or early 2013, subject to the parliamentary timetable.
Feedback on MMR Consultation Paper CP11/31and final rules (PS12/16)
MMR Consultation Paper CP11/31
Book a place at one the FSA's MMR Roadshows