Fears that new mortgage rules may stifle market more

Fears that the new mortgage rules announced on Wednesday will turn the screws further on the housing market have been expressed.

James Moss, managing director of Curzon Investment Property in London, said: “It’s like shutting the door after the horse has bolted. The credit crisis was caused by banks literally throwing mortgage cash at consumers. 

“But the pendulum is now swinging too much the other way: banks need to lend responsibly and the Government is desperate to kick-start the depressed UK housing market.

“These new measures are very draconian and will simply repress the very housing recovery the Chancellor keeps saying he wants to spur on.

“You can over-regulate as well as under-regulate and these measures appear very excessive.”

Clare Francis, of advice site MoneySupermarket, said: "Tight lending restrictions are here to stay." She added: "But there is a fine lending between lending responsibly and restricting things so much the market is strangled."

The new rules, the end result of the Mortgage Market Review, are to be implemented from April 2014, although responsible lending rules for ‘mortgage prisoners’ – ie, existing borrowers who need a new mortgage but do not meet the normal criteria – can be relaxed immediately. This is on the basis that the borrower has a good track record in repayments and does not want to borrow more money.

From April 2014, the new rules announced this week by the Financial Services Authority mean that almost all mortgages will have to be ‘advised’, and not merely sold. Affordability will be the key, with lenders satisfying themselves by looking at both the applicant’s income and regular outgoings that the borrower can afford to repay the loan.

Interest-only loans are not banned, but there is a significant clampdown, with borrowers having to prove that they can repay the loan. They will not be allowed to rely on selling their property on the basis that house prices will have gone up. Separately, the FSA is launching an investigation into how many interest-only borrowers there already are, how many look set to be unable to repay their loans, and what their lenders are doing about the problem.

Older borrowers will not, despite press speculation, be banned from taking out mortgages, but again they will have to prove that they can afford the repayments. The Daily Mail argues that for someone in their fifties, whose mortgage term may not end until they are in their seventies, this may prove a major stumbling block.