New proposals aimed at putting a stop to risky mortgage lending practices have been unveiled by the Financial Services Authority (FSA).
The regulator has pledged that the proposals will see prospective borrowers - whether they are first time buyers, right-to-buy tenants or home movers - get the right information and advice, at the right time, and ensure mortgage lenders will be properly checking each applicant's realistic ability to repay their mortgage.
Under the new rules, lenders have been told they must better assess the affordability of loans, with mortgages only being advanced where there is 'a reasonable expectation' that it can be repaid without house prices having to rise.
Lenders will also have to consider how affordable a mortgage might be if interest rates were to rise.
It has also been suggested that lenders should assess the affordability of interest-only mortgages as if they are repayment ones, unless there is a 'believable' strategy for paying off the loan which again does not rely on house prices rising.
Other key elements of the proposals include income having to be verified in every mortgage application, thereby bringing an end to the self-certified mortgage.
Although lenders will not have to consider in detail what borrowers spend, they will have to take into account 'unavoidable bills', such as heating and council tax.
With the nature of the rules affecting the types of products that can be offered going forward, existing borrowers have been assured that they will be unaffected by the new regime and will be able to remortgage, even if they do not meet the new affordability requirements.
"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," said Lord Turner, chairman of the FSA.
"We believe these proposals will hardwire common sense standards into mortgage lending and guard against the risky lending practices of the past - leaving most borrowers unaffected, but better protected."
The proposals are not likely to be implemented before 2013.
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