MMR: Core underwriting principles announced

Yuan Phoon

December 19, 2011

The three principles are:

Mortgages and loans should only be advanced where there is a reasonable expectation that the customer can repay without relying on uncertain future house price rises.

Lenders should assess affordability which should allow for the possibility that interest rates might rise in future: borrowers should not enter contracts which are only affordable on the assumption that low initial interest rates will last forever.

Interest-only mortgages should be assessed on a repayment basis unless there is a believable strategy for repaying out of capital resources that does not rely on the assumption that house prices will rise.

The FSA said the proposals were aimed to prevent the recurrence of the irresponsible lending which resulted in some borrowers taking on mortgages which only seemed affordable on the assumption that house prices would always rise.

The proposals will see prospective borrowers – whether they are first-time buyers, right-to-buy tenants or home movers – get the right information and advice at the right time and ensure mortgage lenders will be properly checking each applicant’s realistic ability to repay their mortgage.

Lord Adair Turner, chairman of the FSA, said: “The three key proposals are, we believe, justifiable in principle.

“But it is important to estimate as best possible what their impact would be – how many consumers would be protected from the unnecessary distress of arrears and repossessions and also crucial, how many consumers who could have afforded a mortgage might be constrained to take out a smaller mortgage or to delay house purchase or house move.”

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