Mortgage borrowers face some tough financial decisions as lenders look at their spending power rather than their borrowing ability to repay home loans.
Applying for a mortgage has focussed on how much some can borrow rather than how much they could afford to repay each month – but now the tables have turned.
The Financial Services Authority (FSA) has warned lenders that tough new home loan rules will push the responsibility of assessing how much a borrower can afford to repay each month on to the bank or building society.
Free disposable income will become the new tool for mortgage affordability.
Currently, lenders take net income and deduct other finance commitments, like personal loans and credit cards, to leave a net income for borrowing. Then, an income multiple is applied to give a maximum mortgage commitment.
First time buyers have an average income multiple of 3.12, or net income x 3.12, according to the latest Council of Mortgage Lenders figures for February.
‘Spend, spend, spend’ years are over
The new rules mean underwriters will have to consider all other spending as well.
Borrowers might then have to decide whether they want more cash to put towards a mortgage against other spending, like pension and life assurance contributions.
They might even have to decide to buy a cheaper car or cut their other outgoings.
The change in emphasis on mortgage borrowing is part of an FSA drive to make lenders more responsible for debt. The FSA and Bank of England blame banks for irresponsible lending that led to the credit crunch and want to lessen the chances of another cheap loan fuelled financial catastrophe decimating the economy.
Other likely changes in the pipeline are maximum loan-to-value mortgages to outlaw borrowing like the infamous 125% deals offered by Northern Rock at the height of the house price bubble.
The net result is the ‘spend,spend,spend’ years of easy credit are over and from now on, banks and building societies need to take more responsibility for their borrowers.
