And under revised affordability rules lenders must take full account of the income of the customer, net of income tax and national insurance.
They must also assess, as a minimum, the customer’s committed expenditure, basic essential expenditure and basic quality of living costs of the customer’s household.
In the final Mortgage Market Review rules published today it said the expenditure proposals were welcomed by most respondents who supported the move away from “free disposable income to what they considered a “more balanced, proportionate and practical approach”.
The FS said: “We believe that the rules are sufficiently tight to prevent firms from gaming the expenditure rules, particularly in conjunction with record keeping and monitoring requirements, so we are not setting any specific external benchmark.
The lender is responsible for affordability checks and must verify income in all cases – sounding the death knell for any type of self-certification mortgage in future.
The lender must also stress test borrowers’ affordability taking into account future rate rises.
The FSA said: “The purpose of this requirement is not for lenders to predict the future but for them to take reasonable steps to factor expected interest rate rises into affordability assessments.
“It will not prevent all customers from experiencing financial difficulties – but will reduce the likelihood of them finding mortgages unaffordable due to expected changes to interest rates.”
The new interest rate stress test rules will come into effect after regulatory reform and any decision about whether to vary the minimum stress test counter cyclically will be a matter for the Financial Policy Committee and not the Financial Conduct Authority.
