Newsletter 8 - Christmas newsletter
The Mortgage Market Review – Equity Withdrawal restrictions?
The recent review of the Mortgage Market by the Financial Services Authority (FSA) has brought to light several areas of interest. One particularly important note to some clients for future financial planning is the potential restriction of equity withdrawal from your home…
The main issues from the Mortgage Market Review (MMR) highlighted in the Press have actually already come about. The Horse has already bolted!
The FSA has called for increased assessment of individual affordability and most lenders in the past year have introduced such systems.
There has also been the effective banning of Self Certification mortgages but this market has long been on its final feet and indeed at the date of release of the MMR there was effectively only one lender offering self cert mortgages!
Mortgage products, loan to values and income multiples themselves will not be directly regulated (see below for a full outline from the Association of Mortgage Intermediaries) but the main cause for concern for me is the proposal that there will be limits applied to the level of equity withdrawal available to borrowers. I find this astounding.
So, theoretically, you can have a strong steady income with a lot of equity in your property but be limited as to how much you can take out of your home, restricting your future borrowing potential. If you want to purchase a second property for your children or investment purposes, what then? Full details are to be finalised but this is surely another case for Offset Mortgages.
With an Offset Mortgage you can have a large amount of your equity readily available without paying any interest on that part of the loan and not paying any fees for this as you may with other forms of borrowing. If you have a large amount of equity in your property it may be worth doing this sooner rather than later to secure your equity for your future.
If you would like some more information around the Mortgage Market Review and Offset Mortgages, please do Contact Us.
The main Mortgage Market Review issues
FSA’s MMR paper has been written on the basis of the conclusion that the regulated framework had failed to effectively control the market. FSA accepts that its previous analysis and judgements were inadequate. Whilst FSA states that it does not want to pre-empt debate, it then goes on to say that it is confident in its position.
FSA proposes that affordability is assessed by taking into consideration consumers’ free disposable income and their borrowing capacity. An affordability assessment will now be required to be carried out for non-advised sales as well as for advised. Whilst interest-only mortgages will still be available it is proposed that the assessment of affordability will now always be based on whether the capital repayment option is affordable to the consumer.
FSA intends to make lenders ultimately responsible for the affordability assessment and hold them accountable for their lending decisions. However, FSA still considers that an intermediary could not properly ascertain the suitability of a mortgage product without first assessing a borrower’s ability to repay it. FSA also considers that intermediaries are best placed to obtain information about consumers’ income and expenditure. Therefore, it proposes that intermediaries should carry out a preliminary assessment of affordability, leaving the lender to undertake the final assessment.
The paper states that intermediaries should retain a record of the customer’s information for a minimum period of three years, whereas lenders are only required to retain a record for one year. AMI cannot see any rationale for this disparity of standards.
FSA proposes to ban self-certified mortgages as all income will need to be verified. Fast track of a sort can still take place but only after income verification has been carried out.
FSA has proposed to limit levels of equity withdrawal available to consumers, which will mean that consumers will no longer be free to decide what they wish to do with the equity they hold in their property. The proposals go on to promote renting as a positive alternative to home purchase appearing to show a desire to move away from the property owning democracy that has existed in the UK for the last 50 years. It would appear that FSA is proposing a new level of social engineering within the UK.
Other issues in Mortgage Market Review discussion paper
The issues surrounding FSA’s intention to bring buy to let (BTL) mortgages within its regulatory framework requires further consideration. The FSA does not currently have jurisdiction over BTL mortgages; therefore, it is likely that we will see further discussion around this issue from HM Treasury. AMI would want to see that any proposals balance the desire to protect consumers with a consideration of how FSA regulation would affect the wider commercial rental sector.
AMI is also concerned about FSA’s proposed move to oral disclosure and how it will require this to be evidenced. The period for the discussion paper ends on 30th January 2010. A feedback statement will then be issued by the FSA in March 2010 with a consultation paper to follow.