What mortgage reforms mean for you

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The irresponsible lending that led to the credit crunch was always going to mean that mortgages came under closer scrutiny. The Financial Services Authority has been weighing up the best way to control the market without destroying it, and has finally announced its plans for regulation.

So what does it mean for you?
The Mortgage Market Review has introduced a number of changes which will affect tranches of borrowers, depending on the kind of mortgage they had in mind.

Do you want interest-only?
In the past you didn't have to provide evidence that you had a way of paying for the property when the mortgage period ran out. You could simply tick a box that said you had a plan, which meant millions were crossing their fingers and hoping that house price rises would leave them in a position to trade down and pay off the debt.

If you were hoping to use an interest-only mortgage to keep your payments down, and cannot afford to also put money aside into an investment vehicle to pay it off at the end of the period, then this avenue will effectively be shut to you. As a result of this, interest-only is likely to become a thing of the past: "We would expect most mainstream lending to take place on a capital and interest basis with interest-only being considered in limited circumstances," the report said.

You could argue that this is the best way to stop people taking unnecessary risks. However, you could also argue that assuming you held the property for 25 years, a combination of price rises and general inflation will mean your loan looks much more manageable at the end of the period. If people are taking a calculated risk, then should they really be stopped from doing so?

Can you afford the repayments?

When calculating the cost of the mortgage - and whether you can afford it - lenders will have to ask some really probing questions. They will need proper proof of your income, and then to go through all your outgoings - including everything from holidays to childcare and groceries. As part of this calculation they will also have to consider what would happen when a variable interest rate rises.

This is a brilliant development and a sensible way to ensure people consider everything when they think they can afford a mortgage. It's going to add another level of administration and hassle to what is already a tortuous process, but few would argue that it's not worth the time and effort.

Can you prove your income?

Some things will be outlawed. This includes self-certification mortgages which allowed self-employed people to sign a document saying they earned enough to pay the mortgage - and therefore avoided the need to prove it. There will also be an end to 'fast-track' mortgages which meant lenders could approve the mortgage in many instances without verifying income.

These are sensible steps. The self-certification mortgages were known as 'liar mortgages' because people were so quick to claim an income that was well beyond the realms of reality. If you're going to base a mortgage on whether you have the income to afford it, then actually checking the income is a sensible first step.

Are you self-employed?

Of course, for those who have wild variations in their income, this is not a positive development. Self-employed people may struggle to prove a particular level of income. You would have to earn at a particular level for at least a couple of years before you had the paperwork to prove it. This seems particularly harsh given that anyone in employment only needs a job for a couple of months to be granted a mortgage.

Are you approaching retirement?

The new regulations will take into account whether the mortgage period will continue into retirement. If that is the case you can expect more probing questions to make sure you can afford to deal on your pension. Again, it's another tough hoop to jump through, but one designed to stop people finding themselves suddenly unable to retire when they planned.

What if you no longer qualify and need to remortgage?

If you have a mortgage under the old rules, there's always the worry that new regulations will outlaw the kind you have and you won't qualify for anything else. It's thought that about 225,000 current mortgage holders wouldn't qualify under the new rules.

The good news is that there is room in the regulations for many existing customers to get new mortgages even if they do not meet the new requirements. We can only hope that sense will prevail and if they have been able to pay their mortgage to date, there's no reason to suppose they will suddenly lose the ability or the will to stick to their new repayments.

Unfortunately there are others who will not be able to remortgage, particularly if they are in negative equity. In these circumstances they may have no other option than to stick with their current lender on the SVR until their circumstances improve.

This, of course, begs the question of how these new regulations are supposed to make life better for customers when they force do many to languish on a terrible rate.
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