Millions of home owners face restricted lending
More than 5m home owners will become “mortgage prisoners” or be forced to move to a cheaper area if new mortgage rules are introduced, lenders have warned.
By Myra Butterworth, Personal Finance Correspondent
Published: 4:37PM GMT 04 Nov 2010
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The Council of Mortgage Lenders unveiled new figures yesterday suggesting tough new lending restrictions will lead to 2.2 million existing home owners being refused a new mortgage. These so-called “mortgage prisoners” would be trapped in their homes, unable to remortgage or move.
A further 3.4 million home owners would be able to obtain a new mortgage, but they would be offered less than the amount they would have been able to borrow previously, forcing them to move to a cheaper property.
The strict new rules on how much a person can borrow are expected to be introduced next year by the City regulator, the Financial Services Authority. They evolved after banks were accused of giving large loans to borrowers who could not afford them.
Under then FSA’s proposals, the amount a person could borrow would be restricted by taking into account future rises in interest rates and whether they could afford their monthly payments based on a repayment mortgage rather than an interest-only deal.
But the CML said the FSA had “got it wrong” as the rules would actually end up hurting more borrowers than they helped.
Speaking in London at the publication of the research, Michael Coogan, the director general of the CML, described the new rules as “an overreaction to past problems”.
He said: “The FSA is not prepared to change its basic approach on income verification and affordability. This will have market consequences – we think they are intended, and they would seriously undermine the mortgage market in the future.”
Research released by the CML earlier this week showed 45 per cent of people taking out a mortgage this year would have been hit by the FSA’s new rules if they were already in force.
It comes as economists warned that housing market data had already become “increasingly negative”.
Paul Diggle, a property economist at Capital Economics said: “The stock of unsold properties on the market expanded once again and mortgage market activity remains extremely depressed.
“Most of the house price indices are pointing to a weakening house price trend. With the economic recovery set to lose momentum, we expect housing market activity and house prices to fall further next year.”
Falling house prices raise the prospect of increasing numbers of home owners falling into negative equity, where their mortgage is greater than the value of their home.
A separate report by ratings agency Standard & Poor’s disclosed that more than one in 10 mortgages in the North West were in negative equity at the end of June.
The FSA said the new rules were aimed at replacing risky lending and unaffordable borrowing with “common sense standards”.
It said home owners were benefiting from historically low interest rates, and that 46 per cent of households had little or no money left after their mortgage and other bills were deducted from their income.
A spokesman for the FSA said: “Even a modest rise in interest rates could lead to a significant increase in the number of families suffering financial distress. This is why it is imperative that we ensure lenders act responsibly and do not return to irresponsible practices, in order to protect consumers from taking on mortgages they cannot afford and potentially losing their homes.”
http://www.telegraph.co.uk/finance/personalfinance/8110719/Millions-of-home-owners-face-restricted-lending.html
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