New Mortgage Rules April 2014 FCA guide

[Amethyst]

Your mortgage must be affordable

If you’re getting a new mortgage to buy a home, increasing your current mortgage, or remortgaging, your lender must check that you can afford your repayments now and in the future.
To do this they will need information about your income and outgoings. They will also work out how a rise in interest rates might affect your monthly mortgage payments.
You will have to tell them if you expect your income or outgoings to change in a way that means you’ll have less to spend on your mortgage payments.

Getting a mortgage

What you need to know when you get a new mortgage or change your existing mortgage.

In the past, some people were allowed to take out mortgages they couldn’t afford. This meant they fell behind with their payments or lost their homes.
The Financial Conduct Authority (FCA) sets the rules for mortgage lenders and advisers in the UK.
We have looked at how the process of getting a mortgage can be improved to prevent these problems. As a result we have introduced new rules from April 26 2014 for lenders and advisers.

Proving your income

You will need to give your mortgage lender evidence of your income. For example, you might have to show them your payslips if you’re employed, or your accounts or tax returns if you’re self-employed.
Confirming what you spend
Your lender will need to know what you spend on:
• essential expenses that you have to pay, like food, gas, electricity and council tax
• basic quality of living costs, like clothes, household goods, leisure and childcare
• repayments and other commitments, like credit card bills or hire purchase payments
The details you are asked for will vary between lenders and may be different to mortgage experiences you’ve had before.
For an interest-only mortgage, the lender will need to see your plan for repaying the loan when the interest-only period ends.

Getting advice

When you take out a mortgage, you will usually speak to a mortgage adviser. They will discuss your personal circumstances, including your income and what you spend.
Then they will look at what kind of mortgage is suitable for you. They may need to research the mortgage market before they recommend a deal that they think is right for you.

Getting a mortgage without advice

In some circumstances you can apply for a mortgage without taking advice. This is usually done by post or online. However, you would need to know all the details of the mortgage you wanted, and be able to arrange it yourself without speaking to an adviser.
If you choose to do this, your lender or adviser must tell you about the legal protection you will lose by not getting advice. This includes the right to complain about how suitable the mortgage is for you.


Who can advise you

You can get advice about mortgages directly from an adviser at a mortgage lender (like a building society or bank), or from a mortgage broker or financial adviser.
What an adviser must tell you
When you first speak to an adviser they have to tell you:
• what their charges are and how they are paid
• if there are any limits to the range of mortgages they can recommend for you
For more information go to: www.fca.org.uk/getting-a-mortgage
For free and impartial help on choosing the right mortgage go to: www.moneyadviceservice.org.uk/mortgages

[Amethyst]

Re: New Mortgage Rules April 2014 FCA guide

11.6.5 R When assessing for the purposes of MCOB 11.6.2R whether a customer
will be able to pay the sums due, a firm:
(1) must not base its assessment of affordability on the equity in the
property which is used as security under the regulated mortgage
contract or is subject to the home purchase plan, or take account
of an expected increase in property prices;
(2) must take full account of:
(a) the income of the customer, net of income tax and national
insurance; and, as a minimum
(b) (i) the customer’s committed expenditure; and
(ii) the basic essential expenditure and basic qualityof-
living costs of the customer’s household;
(3) (if it is a mortgage lender) must assess affordability on the basis
of both repayment of capital and payment of interest over the
term, except where lending under an interest-only mortgage in
accordance with MCOB 11.6.41R(1); and
(4) (if it is a mortgage lender) must take account of the impact of
likely future interest rate increases on affordability, as set out in
MCOB 11.6.18R.

11.6.6 R For the purposes of MCOB 11.6.2R, a firm must not rely on a general
declaration of affordability by the customer or his representative.


Income multiples
11.6.7 G A firm may wish to impose a limit, expressed as a multiple of the
customer’s income, on the amount it is prepared to advance under a
regulated mortgage contract or home purchase plan. Such an approach
is not, of itself, inconsistent with MCOB 11.6.2R but, in accordance with
the rules in this section, the firm must be able to demonstrate that the loan
is affordable, having taken full account of the customer’s income and
expenditure, and (for a mortgage lender) the impact of future likely
interest rate increases on affordability.
Income
11.6.8 R In taking account of the customer’s income (in accordance with MCOB
11.6.5R(2)(a)) for the purposes of its assessment of whether the customer
will be able to pay the sums due:
(1) a firm must obtain evidence of the income declared by the
customer for the purposes of the customer’s application for the
regulated mortgage contract or home purchase plan (or
variation). The evidence, whether document-based or derived
through the use of automated systems, must be of a type and for
a period which is adequate to support each element of income
that the firm is taking into account, and subject to appropriate
anti-fraud controls; and
(2) a firm must not accept self-certification of income by the
customer, and the source of the evidence in (1) must be
independent of the customer.
11.6.9 G In relation to taking account of the customer’s income for the purposes of
its assessment of whether the customer will be able to pay the sums due:
(1) income may be derived from sources other than employment
(such as pensions or investments), or from more than one job;
(2) the evidence necessary to comply with MCOB 11.6.8R will vary
according to factors such as the employment status and the
nature of the employment of the customer (for example, whether
he is employed, self-employed, a contractor or retired), his
length of employment and, in particular, any elements of income
that are not contractually guaranteed. For example: income from
overtime working may be evidenced by payslips over a period of
time or by checking the level of income regularly paid into a
bank account;
(3) for a self-employed customer, a firm may wish to consider using
projections of future income, where these form part of a credible
business plan;
FSA 2012/46
Page 101 of 138
(4) a firm may use information it already holds about a customer’s
income, for example where the customer holds a current account
with the mortgage lender;
(5) the source of evidence may be independent of the customer even
where it is supplied by the customer; for example, in the form of
payslips, bank statements or tax returns;
(6) a firm may use information provided to it by a home finance
intermediary or other third party, including electronic sources of
information, but the firm will retain responsibility for
compliance with this chapter; and
(7) mortgage lenders and home purchase providers are reminded of
their obligations under SYSC 8 in respect of outsourcing where
they choose to use a third party to verify income information.
Expenditure
11.6.10 R For the purposes of a mortgage lender’s or home purchase provider’s
assessment of whether the customer will be able to pay the sums due:
(1) the committed expenditure of a customer in MCOB
11.6.5R(2)(b)(i) is his credit and other contractual commitments
which will continue after the regulated mortgage contract or
home purchase plan (or variation) is entered into;
(2) the basic essential expenditure of a customer’s household in
MCOB 11.6.5R(2)(b)(ii) comprises expenditure for:
housekeeping (food and washing); gas, electricity and other
heating; water; telephone; council tax; buildings insurance;
ground rent and service charge for leasehold properties; and
essential travel (including to work or school); and
(3) the basic quality-of-living costs of a customer’s household in
MCOB 11.6.5R(2)(b)(ii) are its expenditure which is hard to
reduce and gives a basic quality of life (beyond the absolute
essential expenditure in (2)).
11.6.11 G (1) Examples of committed expenditure are: credit commitments
such as loans and credit cards; hire purchase agreements; child
maintenance; alimony; and the cost of a repayment strategy
where the customer has an interest-only mortgage (where
affordability has not been assessed on a capital and interest
basis: see MCOB 11.6.48R (Assessing affordability under an
interest-only mortgage)).
(2) Examples of basic quality-of-living costs (which can be reduced,
but only with difficulty) are: clothing; household goods (such as
furniture and appliances) and repairs; personal goods (such as
toiletries); basic recreation (television, some allowance for basic
FSA 2012/46
Page 102 of 138
recreational activities, some non-essential transport); and
childcare.
11.6.12 R For the purposes of its assessment of whether the customer will be able to
pay the sums due:
(1) a firm may generally rely on any evidence of income or
information on expenditure provided by the customer unless,
taking a common sense view, it has reason to doubt the evidence
or information;
(2) in taking account of the customer’s committed expenditure, a
firm must take reasonable steps to obtain details of the
customer’s actual outstanding commitments; and
(3) in taking account of the basic essential expenditure and basic
quality-of-living costs of a customer’s household, a firm may
obtain details of the actual expenditure. Alternatively, it may
use statistical data or other modelled data appropriate to the
composition of the customer’s household, including the
customer, dependent children and other dependents living in the
household. If it uses statistical or other modelled data a firm
must apply realistic assumptions to determine the level of
expenditure of the customer’s household.
11.6.13 G (1) Examples of evidence of income in MCOB 11.6.12R(1) are
payslips and bank statements.
(2) If a firm obtains details of the customer’s credit commitments
from the customer, it should corroborate the information, for
example by making a credit reference agency search or checking
credit card or bank statements.
(3) Where the customer’s credit or contractual commitments are due
to end shortly after the regulated mortgage contract or home
purchase plan (or variation) has been entered into, a firm should
take a common sense approach to deciding whether to include
those commitments in its assessment of whether the customer
will be able to pay the sums due, according to such factors as the
remaining term of the commitment and the magnitude of
payments required under it.
Future changes to income and expenditure
11.6.14 R If a firm is, or should reasonably be aware from information obtained
during the application process, that there will, or are likely to, be future
changes to the income and expenditure of the customer during the term of
the regulated mortgage contract or home purchase plan, the firm must
take them into account when assessing whether the customer will be able
to pay the sums due for the purposes of MCOB 11.6.2R.
FSA 2012/46
Page 103 of 138
11.6.15 G (1) Examples of future changes to income and expenditure in MCOB
11.6.14R are: reductions in income that may come about following
the customer’s retirement; where it is known that the customer is
being made redundant; or where the firm is aware of another loan
commitment that will become due during the term of the regulated
mortgage contract or home purchase plan, such as an equity loan
to assist in property purchase.
(2) If the term of a regulated mortgage contract or home purchase
plan would extend beyond the date on which the customer expects
to retire (or, where that date is not known, the state pension age), a
firm should take a prudent and proportionate approach to assessing
the customer’s income beyond that date. The degree of scrutiny to
be adopted may vary according to the period of time remaining to
retirement when the assessment is made. The closer the customer
is to retiring, the more robust the evidence of the level of income in
retirement should be. For example, where retirement is many
years in the future, it may be sufficient merely to confirm the
existence of some pension provision for the customer by requesting
evidence such as a pension statement; where the customer is close
to retirement, the more robust steps may involve considering
expected pension income from a pension statement. In accordance
with MCOB 11.6.12R(1), a firm should take a common sense view
when assessing any information provided by the customer on his
expected retirement date.
(3) Where an additional loan commitment is expected to become due
during the term of the regulated mortgage contract or home
purchase plan, the mortgage lender should assess whether the
regulated mortgage contract or home purchase plan will remain
affordable when the loan commitment becomes due, unless there is
an appropriate repayment strategy in place to repay that loan, such
as through the sale of the property which is the subject of the
regulated mortgage contract or home purchase plan.

[IanM]

Re: New Mortgage Rules April 2014 FCA guide

" They will also work out how a rise in interest rates might affect your monthly mortgage payments."

This part confuses me a little.

If I was to borrow, for example, £100,000 on 1st January 2014 at 3.5% to buy a house and that £100k was paid to the seller, then why should the lenders be allowed to change the interest rate at which I borrowed the money at originally, I am not re-borrowing the money at the time the interest rates rise so why should I pay the current interest rate and not the original interest rate?

[Mr $quanda£ot]

Re: New Mortgage Rules April 2014 FCA guide

In principle, idea of this is good. Looking at the current house prices - especially in the Greater London area - it makes one wonder where all this money is coming from. Surely salaries are no longer the main source!

It will be interesting to see how these new 'rules' are enforced and the subsequent effect on the UK property market.