The MMR aims to prevent risky lending seen in boom times by ensuring that mortgages are taken out on a common sense basis and repayment vehicles are in place without the assumption of rising house prices.
The FSA claims the proposals will ensure prospective borrowers will get the right information and advice at the right time.
Lenders will be responsible for checking each applicant’s realistic ability to repay their mortgage.
Income will have to be verified in every mortgage application.
Lenders will have to take into account unavoidable bills when assessing affordability such as heating and council tax but not what borrowers spend.
Interest-only mortgages will still be offered but only on the basis that the borrower will have a credible plan to repay the capital. This does not include the assumption of a rise in property values.
Lenders will have to consider the impact of increases in interest rates in line with current expectations on the affordability assessment. Borrowers should not enter contracts which are only affordable on the assumption that low initial interest rates will last forever.
Applicants such as those trying to consolidate debts with a mortgage, will be forced to get advice to ensure they understand the full implications and costs.
Existing borrowers will be unaffected and lenders will have the flexibility to provide new mortgages to some existing customers even where they do not meet the new affordability requirements.
The consultation period for CP 11/31 will end on 30 March 2012.
Following consultation the FSA Board will make a decision on the final form of rules in summer 2012 but implementation will not be before 2013.
Lord Adair Turner, chairman of the FSA, said: “We believe that these are common sense proposals which serve the interests of both lenders and borrowers.
“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.
“The three key proposals are, we believe, the most effective way to tackle the problem of risky lending. But it is essential that we understand what their impact would be, how many consumers would be protected from the distress of arrears and repossessions and how many consumers who could have afforded a mortgage might have to take out a smaller mortgage or to delay their purchase.
“The estimates are inherently uncertain, but they suggest that that the new rules would have only a marginal effect in current market conditions, and particularly so for first-time buyers, but would act as a significant constraint if market practice were in danger of returning to the 2005 to 2007 pattern.
“That pattern of effect would be a highly desirable one. We are however particularly keen that lenders provide their detailed assessment of the likely impact of these proposed rules. Then the FSA will be able to make appropriate final decisions.
“The proposals published today reflect the ideas and input of many stakeholders, including consumer groups and lenders. 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.”
