Is it Going To Get Even Harder for Homebuyers?
15 Jul 2010 Tell a Friend
As if it has not been difficult enough to obtain a mortgage over the past few years, things may be set to get even trickier for new homebuyers. The Financial Services Authority (FSA), the company that currently regulates the UK's financial services industry, has published a report outlining proposals for further tightening mortgage lending criteria.
Of course, for most of us a mortgage is the single largest financial commitment we will take on, and it stands to reason that mortgage holders should be able to comfortably meet the repayments. However, the report has met with a mixed response from the industry. Although debt charities welcome the suggestion of offering consumers increased protection, some in the mortgage market are concerned that stricter regulation will make mortgages even more expensive for homebuyers, as well as less accessible.
What does the report say?
The main aim of the FSA's report is to put forward suggestions for responsible practices in time for the next economic 'boom' period, based on the learnings from past mistakes. The three main areas covered by the report are:
Interest-only mortgages
An interest-only mortgage is one where you do not need to repay any of the actual amount borrowed until the end of the mortgage term. As the name would suggest, you would only need to repay the interest on the mortgage each month. The idea is that if you took out an interest-only mortgage, you would also have an investment portfolio in place (an endowment policy is a common complementary product) that would grow over time giving you the necessary funds to clear your mortgage at the end of the period.
According to the FSA, many homeowners count on future house price rises to provide them with the capital to repay their mortgage. Of course, this plan only works as long as house prices continue to rise. Several years ago, this gamble failed spectacularly for thousands of UK homeowners when the housing market collapsed and many people found themselves with properties worth less than the value of their outstanding mortgages (known as 'negative equity'). Recognising that interest-only mortgages are becoming increasingly popular, the FSA wants much stricter regulations on who can get accepted to avoid people getting into financial difficulties.
Self-certified and Fast-track mortgages
Self-certified (or 'self-cert') mortgages are products available to self-employed consumers, or to anyone who for different reasons has a non-standard income stream. During the last mortgage 'boom' period, the regulations on self cert mortgages were relatively lax and unscrupulous lenders started offering self-cert mortgages to anyone who was not able to get accepted elsewhere.