MMR: Affordability must be assessed on repayment basis says FSA

13 July 2010 | By Natalie Thomas

In the Financial Services Authority’s consultation paper on responsible lending today it has ruled that mortgage affordability must be assessed by lenders on a capital repayment basis, even where the mortgage is interest-only.

It expects lenders to base their affordability on a maximum term of 25 years and on a capital repayment basis.

In its paper it says: “We believe steps must be taken to repay the capital and if a consumer cannot afford to do this then the mortgage is not affordable.”

It says it is considering whether there may be some limited exceptions to this but it will consult on this at a later date.

The FSA says lenders should fully assess the consumer’s ability to repay for all mortgage applications, in the light of their income expenditure and outstanding debts, assessing borrowing capacity based on a consumers free disposable income and allowing for future increases in interest rates.

It intends to publish guideline margins for firms to address the problem of variability of rates over time and to ensure minimum standards are adhered to across the industry. The rate will be set with reference to forward swap rates.

The FSA expects lenders to take into account a borrowers expenditure when assessing affordability such as food, clothing and recreation.

It expects lenders to also take into account a borrowers tax, national insurance and utility bills. It suggests this could come from the lenders’ own data or external sources.

It is also proposing that when a mortgage advance is taken out a lender checks that this has indeed been used to pay off outstanding debts, if this is what was intended for. It says it may in future look at extending this to further advances in future.

Readers' comments (17)

Stuart Duncan | 13 Jul 2010 8:01 am
No offence meant, but the lunatics have taken over the asylum.

This, in my eyes, was the most dangerous proposal in the MMR due to its potential to damage many older borrowers and harm the housing market.

Why do the the FSA pretend to consult and then ignore reasoned argument? It is a shame that the UK does not have a constitution as this is the sort of thing that should go to court.

The massive danger is that short term mortgages will be assessed on a repayment basis over the actual term, even if there is a lump sum due from pension, inheritance, endowment etc.

It is utterly bonkers.
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Steve | 13 Jul 2010 8:07 am
Over-reaction - again!
How can you tell a 22-25yr old, who could feasibly have a 40 year+ mortage term that they cannot enter into the housing market as their 'desired' loan is unaffordable?
Many Advisers structure saving plans with their clients that allow them - on Int only models - to build up Capital for later repayment/regular injections into the mortage.
Does this throw the Offset model out the window?
The nanny state strikes again via it's most infamous Quango...
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John Whyte | 13 Jul 2010 8:25 am
Whilst in principle I agree with more detailed affordability checking one could say the horse has already bolted on this one and the damage done.

However if nothing else please get in the 21st century - 25yr term basis, another nail in the coffin for first time buyers.
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Anonymous | 13 Jul 2010 8:45 am
Oh the irony! A regulator who advocates Treating Customers Fairly and stresses that this does not mean treating everyone the same then does just that.

In some ways I have less concern with the affordability on repayment than I do on the prescriptive term that should be applied.

Once again I would re-iterate that the FSA should be focussing on unadvised mortgages rather than using the broad brush approach.

This is a consultation paper - let's hope that they are prepared to properly consult.
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Tony Joannou | 13 Jul 2010 8:53 am
Even more stupidity.

What the FSA are saying is that an individual can no longer be responsible for their own decisions and that the state must decide what they can and cant do when it comes to their own financial planning.

Come on someone, isn't their a lawyer out there that can see the injustice in this and deem this unfair under some human rights legislation.
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Ancient Wisdom...is a mortgage broker in N3. | 13 Jul 2010 9:10 am
First time buyers, once again will be hit hard with these sanctions.

Does this apply to Buy to Let?

No doubt, will add further pressure on houseprices and lenders offering fast track, offer it as its a calculated risk - 25% deposit and affordability are taken into account already.

Another example of how 'putting it off' is a disadvantage in financial planning.
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Anonymous | 13 Jul 2010 9:11 am
Brokers do not get listened to so stop wasting your breath, get out there and get a more enjoyable career.
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sjaene obrien | 13 Jul 2010 9:19 am
what about the investment property?
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Trevor Quinn-thomas | 13 Jul 2010 9:48 am
This is a very dangerous approach to a very delicate market. There is no question in my mind there have been some very bad elements working in the mortgage market. However where in any of this is the consumers responsibility. It is an obvious thing that if you spend more than you earn or borrow too much then you will not be able to pay it back.

These proposals are far far to much they will not protect any one and are very likely to destroy any sort of housing recovery.

The proposals themselves discriminate again those of us that are already getting closer to retirement. Further more they do nothing to deal with the unsecured end of the market which is where the most toxic end of the market begins.

Stop this now before the market is further damaged.
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Sam Palmer | 13 Jul 2010 10:04 am
one aspect is always missed, risk return reward. The deposit is the risk of the borrower as is the risk of losing the property, the reward is for the lender up to 3 times the principlein interest.This new aplication will ring fence lending to the very few and create an elite
top weighted property market that will make people rent until middle age and dry up the market for ftb.
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