UK Mortgage Borrowers to Face Strict FSA Control

Today, on October 19th, the British financial watchdog – the Financial Services Authority – said it is about to introduce major reform of the mortgage market. The FSA announced that it wants all UK lenders to check spending habits of borrowers prior to approving mortgages.
From now on, all borrowers will be required to take an “affordability test”, the aim of which is to determine whether borrowers have enough income to support the mortgage loan they are applying for.
It is to be noted that some UK lenders already have “affordability tests” of their own, which usually include the so-called practice of “income multiples”, under which the lender will only lend the amount of money several times the borrowers’ income. Lenders’ tests are also oftentimes “affordability-oriented”, which means that banks and building societies ask borrowers to provide them not only with income proof, but also with spending data, such as credit card debt, personal loans, and sometimes even tax, insurance premiums, utility bills, etc.
Now, the FSA wants all banks and building societies to make use of this practice on all types of loans. Moreover, lenders will have to toughen test standards by including bank statement checks into the process. The lenders will also be required to access borrowers’ spending habits, as well as their income levels.
In addition to all of the above-mentioned measures, the FSA plans to ban self-certification mortgages, which have been traditionally used by self-employed Brits. Previously, self-certification mortgages did not require borrowers to provide any income proof. The FSA also intends to regulate buy to let mortgages as well as ban so-called “toxic mortgages”, which earlier were given out to borrowers with small deposit and poor credit history.
The major concern associated with the newly announced incentives is practical implementation of affordability tests. The FSA suggests using the Office for National Statistics data and other sources to check whether borrowers lie about their income and spending levels.