Over the last year or so most Governments, companies and individuals will have come to appreciate more of the corrosive aspects of debt. Debt has been one of the main tools used over the last 20 years or so to fuel our way of life, though few actually appreciated the degree to which indebtedness would become a problem. The notion of saving has been lost for the majority of a generation (on a generalised national basis) a culture of buy it now, pay for it later, following the widescale adoption of HP (Hire Purchase) in the US in the last century. However borrowing is nothing new, it is as old as human culture, one of the first recorded words of wisdom about debt can be found in Proverbs. Chapter 22 (verse 7) says “The rich rule over the poor, and the borrower is servant to the lender.” In 2011 we still find this verse to be a rather sad statement of fact. The concept of debt being wiped off after 25 years is known as “Jubilee” and might be regarded as a principle for life.

Today the FSA have announced some new rules in relation to mortgages, following its Mortgage Market Review (MMR). You may be surprised at the key principles, which any reasonable person would have probably assumed were already a part of the borrowing process. To paraphrase:

1. Mortgages and loans can only be advanced where there is a reasonable chance of them being repaid, without including the possibility that property prices will rise.

2. Lenders should assess the afforability of the loan, allowing for the possibility that interest rates might rise. Borrowers should not enter contracts on the assumption that interest rates will remain low forever.

3. Interest only mortgages should be assessed as though they are on a repayment mortgage basis. Assumptions about the ability to repay debt from rising property values are not to be permitted.

In short, plain English – don’t enter into a loan that you cannot genuinely afford and allow reasonable assumptions about changes in the future. I assume that this new approach (which seems like common sense to most of us) has clearly not been applied by most of the Governments in the West and in particular in Europe, with some obvious and notable exceptions.

The FSA also propose banning self-certification mortgages (where the borrower provides minimal information but confirms that the loan is affordable). In addition, the proposals include banning “non-advised” mortgages – in other words a proper dialogue and presumably therefore a proper assessment will need to take place by the lender of the borrower, with the exception of high net worth borrowers (who presumably the FSA believe never make such mistakes with finance). A statistic that I find somewhat staggering and highly alarming is that something like 50% of mortgages are currently “non advised” according to the FSA, which does rather pose a few questions doesn’t it and once again suggests further evidence of negligent lending and borrowing which one would like to have believed would have been spotted some time ago.

The FSA Consultation Paper (CP11/31) will be followed with consultation and it is expected that new rules will be brought into effect from the summer of 2013. The FSA are very keen to ensure that responsible lending is achieved (and by inference, responsible borrowing).  The report is based upon reducing the number of people that experience problems with repaying debt. The majority of mortgage arrears are caused by unemployment/redundancy  (32%), relationship breakdown/divorce (26%), serious illness/accident (15%), extended work break to care for young children (11%), partner serious illness/accident (7%), no self-employed income (6%), business failure (3%) and finally time caring for parents (2%). Those mathematicians amongst you will figure out that there must be an error in the data as this amounts to more than 100% (102%) which again is a little concerning that the regulator cannot check its own data.That said, clearly the relevant point is that life changes, stuff happens – be as prepared as you can be, reasonbly.

What this means for most of us is that lenders will now probably charge more for the extra work that they do, so expect loan and mortgage fees to rise. Borrowers will probably also find themselves wasting more time and by going direct to a lender, may be deterred by the lengthy experience from shopping around. Therefore having a top rate independent mortgage adviser with access to the entire market should be a significant advantage. We don’t arrange mortgages any more, but are ideally placed to put you in touch with one.

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