The Financial Services Authority (FSA) has today outlined proposals to ensure all mortgages are carefully assessed to make sure borrowers can afford them.

Reflecting the FSA’s enhanced consumer protection strategy and intensive day-to-day supervision, the proposed changes aim to ensure all lenders get back to the basics of responsible lending and that problems are prevented before they can develop or get out of control.

Some of the key proposals include:

- Imposing affordability tests for all mortgages and making lenders ultimately responsible for assessing a consumer’s ability to pay;

- Requiring verification of borrowers’ income in every case to prevent over inflation of income and to prevent mortgage fraud;

- Extra protection for vulnerable customers with a credit-impaired history.

The tough new proposals, published in the consultation paper, form part of a major review by the FSA into the UK mortgage market and are based on detailed analysis of past lending decisions, looking at the causes of arrears and repossessions since 2005.

The FSA found that:

- 46% of households either had no money left, or had a shortfall after mortgage payments and living costs were deducted from their income;

- Almost half of new mortgages between 2007 and the first quarter of 2010 were provided without a customer having to verify their income;

- The share of interest-only mortgages has been increasing. At the peak of the market, over 30% of all mortgages were interest-only;

- Many consumers with no repayment vehicle count on future house price rises or uncertain life events to repay their mortgage and some have no plan at all;

- Borrowers with a credit-impaired history are particularly vulnerable.

Lesley Titcomb, FSA director responsible for the mortgage market, said:

“There is a clear link between financial overstretch and mortgage arrears and repossessions, and we are determined to protect vulnerable consumers by making sure that everyone who takes on a mortgage can afford to pay it back.  

“While it is clear the mortgage market has worked well for many, we need to build a strong new framework to protect mortgage customers and to ensure that the problems we have seen in the past do not happen again, particularly as the mortgage market recovers.”

Today’s report also includes the key findings from the FSA’s review into arrears charges, which indicated significant variation in the level of arrears fees across the market.  

The mortgage rules require arrears charges to be based on a reasonable estimate of the cost of the additional administration required as a result of the customer being in arrears.

The FSA is actively seeking views from consumer groups and industry and invites responses by 16 November 2010.

Payplan, the free debt advice provider, has welcomed the FSA’s latest changes to the way lenders should treat customers in arrears, particularly the requirement for lenders to consider all options for borrowers before taking action for possession of the property.

According to Managing Director, John Fairhurst, most Payplan clients with mortgage arrears also have a range of unsecured debts (typically of around £40,000).  

He said:

 “In our experience, mortgage arrears need to be dealt within the context of the overall financial situation that the customer finds himself.

“In trials where we are working with a small number of mortgage lenders to talk to their clients who are in arrears, we have found that by engaging the customer about the totality of their debt situation we are nearly always better able to effect a solution that stabilises and makes the client’s repayments on his unsecured debt more manageable, leaving a greater proportion of available income to put towards improving the mortgage arrears situation.

“Without having to run the risk of giving advice, lenders adopting a more holistic approach to their customers’ arrears problems, can turn the FSA’s new rules to their own advantage put more customers back on the straight and narrow and fulfil their obligations under TCF.

“Rather than being an extra burden, lenders should see the FSA’s requirements to consider all options for clients in debt as an opportunity to help tackle underlying unsecured debt liabilities at source and thereby free up more disposable income for repayment of mortgage arrears.”

CML director general Michael Coogan said:

“There will always be a regulatory trade-off between protecting consumers from over-borrowing, and increasing the barriers to home-ownership. The mortgage market for the time being has already corrected, to a degree that the main consumer concern right now is about access to finance, not about risky lending.

“The risk is that the gain will not match the pain in the short term. The industry and consumers will feel the costs of imposing new regulatory requirements now, in a market where they are not needed, but the potential consumer benefits will only be felt at some unspecified time in the future.

“We look forward to working with the FSA to ensure that a pragmatic approach to implementation can be adopted as far as possible, to reduce the negative side-effects that may arise from well-intentioned regulation.

“There is also a need to manage the regulatory burden that may emerge if the UK proceeds with changes just at the time that the European Commission is also due to publish proposals on the same aspects of mortgage regulation.”

Three-quarters of homeowners do not know what impact an interest rate hike would have on them, according to research from the new government-backed consumer education body.

Around 74% of people with a mortgage admitted they did not know how a 1% rise in the Bank of England base rate would affect their monthly outgoings, according to the Consumer Financial Education Body (CFEB).

More worryingly, 15% of people do not even know what type of mortgage they have, such as whether it is a fixed rate deal, meaning they would be unaffected by an interest rate rise, or whether it is a variable rate one, meaning their monthly payments would go up.

A further 15% also do not know when their current mortgage deal comes to an end.

The lack of awareness comes despite the fact that 51% of people with a mortgage expect interest rates to rise during the coming nine months. Economists, meanwhile, expect the first rate rise to be around April or May next year.

Just over half of people said they had no plans to review their mortgage, or would leave doing so until just before their existing deal expired, while 14% admitted they did not know what they would cut back on if their mortgage repayments rose by £200 a month.

Tony Hobman, chief executive of the Consumer Financial Education Body, said: ‘Interest rates have been at record lows for some while now.

‘Although there is uncertainty about when this will change, it is clear from our research that many people with mortgages haven’t thought about what it would mean for their monthly payments, or where they would find the extra money in their household budget if their mortgage rate was to go up.

‘Lack of time means many of us often put off reviewing our finances, but it doesn’t have to be time consuming to keep on top of your money matters.’

The group advises people to look at the ‘Keyfacts’ document they were given when they took out their mortgage, as this shows what their current interest rate is and when their deal expires.

The CFEB was set up in April by the Financial Services Authority to take over responsibility for consumer financial education.

Savers taking out a fixed rate bond today will receive up to 23.3% less interest than they would have nine months ago.

Moneyfacts figures show that 29% of savers are looking to fix their interest rate, with the average amount invested in a fixed rate bond standing at £36,872.

Savers investing the average amount nine months ago would have received £1,209 in interest, compared to just £978 today.

Michelle Slade, Spokesperson for Moneyfacts.co.uk, commented:

“Providers are focused on mortgage lending and as they strive to attract new business by reducing mortgage rates, they are in turn cutting savings rates to balance the books.

“Uncertainty over when bank base rate will rise means most savers are only taking a short term view, but they are being punished by the biggest reductions in rates.

“At 2.62%, the average rate on a one year bond stands at an all time low.

“Prudent savers who rely on the interest from their savings to supplement their income continue to be hit the hardest.

“Inflation also continues to take its toll on savers and is effectively depreciating the value of savers’ capital.

“Savers hoping for incentives from last month’s Budget were left bitterly disappointed and many continue to feel their needs have been forgotten during the credit crisis.

“With a change in bank base rate still predicted to be a little way off, the situation for savers is likely to get worse before it gets better.

“To limit the effects of falling rates, savers need to review their portfolio regularly to ensure they are receiving competitive rates.”

Abbey International has announced that sterling interest rates on its popular 18 month fixed rate contracts are to be increased to 3.25% gross (3.22%AER), giving an effective rate of 4.87% over the 18 month term of the account with immediate effect.

The minimum balance required is £100,000, with the account open to both existing clients and to those with funds not currently invested with Abbey International. This is a limited offer and may be withdrawn at any time.

Abbey International has also upped the rate on its 2-Year Escalator Bond to 3.50% gross/AER in year 1 and 4.00% gross/AER in year 2, giving an excellent combination of return and safety. The minimum balance is again £100,000

Abbey International is part of the highly regarded Santander Group, which has more than 150 years experience in banking and has clients all over the world. Santander has an AA credit rating from Fitch and Aa2 rating from Moody’s credit rating agencies.

People are becoming scared by their levels of debt partly due to the global economic situation, it has been suggested.

UK Insolvency Helpline Debt Advice Service representative Richard Sorsky noted that his organisation has seen a 40 per cent rise in the quantity of calls it has received in the first four months of the year compared to the same period in 2009.

In his view, this situation has been emphasised by the situation economic circumstances being seen in the US and Greece.

“They see Greece going into recession, they see America in recession and they’re now thinking ‘crikey, I’ve got to get help now, I really have to get help’,” remarked Mr Sorsky.

He explained that another reason why the enterprise has been dealing with more enquiries about debts is because more cases are being referred on by banks.

The comments were made in response to a survey by moneysupermarket.com, which found that 14 per cent of respondents regularly use credit cards to pay household bills.

The UK publics’ expectations for inflation over the next year jumped to 3.3% in May, the highest level in almost 2yrs, reveals the Bank of England/NOP Inflation Attitudes Survey – May 2010

Asked to give the current rate of inflation, respondents gave a median answer of 3.6%, compared with 3.3% in February 2010.

Median expectations of the rate of inflation over the coming year were 3.3%, compared with 2.5% in February (the last time it was 3.3% or higher was in August 2008 when it was 4.4%).

By a margin of 56% to 11%, survey respondents believed that the economy would end up weaker rather than stronger if prices started to rise faster, compared with 60% to 9% in February.

56% of respondents thought the inflation target was ‘about right’, a slightly higher proportion than in recent quarters, while 17% said the target was ‘too high’ and 15% said it was ‘too low’.

34% of respondents thought that interest rates had fallen over the past 12 months, compared with 41% in February, while 23% of respondents said that interest rates had risen over the past 12 months, the same as in February.

When asked about the future path of interest rates, 52% of respondents expected rates to rise over the next 12 months, compared with 54% in February, and 6% of respondents expected interest rates to fall over the next 12 months, similar to the last couple of quarters.

Asked what would be ‘best for the economy’ – higher interest rates, lower interest rates or no change in interest rates – the picture was broadly unchanged from recent quarters: 25% of respondents thought interest rates should ‘go up’, 15% of respondents thought that interest rates should ‘go down’, and 37% thought interest rates should ’stay where they are’.

When asked what would be ‘best for you personally’, 25% of respondents said interest rates should ‘go up’, compared with 28% in February, while 26% of respondents said it would be better for them if interest rates were to ‘go down’, compared with 25% in February.

When asked how strongly respondents agreed or disagreed that a rise in interest rates would make prices rise more slowly in the short term, the net response was +15% in February 2010, compared with +14% in February 2009.

When asked how strongly respondents agreed or disagreed that a rise in interest rates would make prices rise more slowly in the medium term, the net response was +24%, compared with +26% in February 2009.

When asked in February if a choice had to be made either to raise interest rates to try and keep inflation down, or to keep interest rates lower and allow prices to rise faster, 66% of respondents said interest rates should rise, while 17% said prices should be allowed to rise. These compared with 66% and 13% in February 2009.

Respondents were asked to assess the way the Bank of England is ‘doing its job to set interest rates to control inflation’. The net satisfaction index – the proportion satisfied minus the proportion dissatisfied – was +29%, compared with +28% in February.