New Mortgage Rules

Tuesday 17 March 2009

As the British financial system is experiencing hard times, the Financial Services Authority is going to announce a ban on 100% mortgages as part of the banking regulations plan. It is expected to become normal practice that loans will not exceed 3 times of a borrower's annual salary, with exceptions made only in extreme cases. As part of the new rule, borrowers will need to provide a minimum of 5% of property value as a deposit, although many banks and building societies might require larger deposits. The new rule was drafted after Gordon Brown asked the Financial Services Authorities to consider banning risky mortgage lending. In February, Brown called for a return to safety-first banking, meaning that he wants to reinvent traditional British banking, where loans are made on very careful terms. It is unlikely that the new rule will influence the property market because lenders have already toughened the loan terms. Rather, the new measures are aimed at preventing a repeat of the current crisis, which was caused by over-generosity of some banks that gave out loans to people who could not afford repayments on property. These so-called "extreme loans", which amounted to 6-7 times of borrower's annual salaries became common in 2006-2007. Also, many lenders provided borrowers with 100% plus mortgages, which often led to repossession of houses. For instance, by the time it was nationalized, Northern Rock already repossessed a number of properties from borrowers who were on a "Together" mortgage plan that offered 120% of house value. As it was already noticed, the new mortgage rule is only a part of the governmental strategy aimed at the regulation of British financial system. A crackdown on executive bonuses which reward risk-taking and new requirements on banks considering capital levels are being prepared as well. The FSA is also preparing new moves, such as offering immunity from prosecution to informants. The Conservatives believe that the FSA is to be punished for its inability to prevent current financial crisis by abolishing the whole institution and handling over its powers back to the Bank of England.