By Mike Edwards

Mortgages could become harder to get, with one in ten borrowers currently eligible for a mortgage being turned down in future. The Financial Services Authority has now published its long-awaited Mortgage Market Review. Its own impact assessment says that the proposed reforms could strip £2.9bn out of the economy because it would mean fewer people buying and selling homes, and lead to a dramatic drop in mortgage lending, affecting one million borrowers. The FSA’s final consultation paper is designed to put a permanent end to the lending excesses that were prevalent pre-credit crunch. But the crackdown could have a severe impact on the already ailing housing market. Among its many recommendations is a new ‘affordability’ regime, which will include looking at a borrower’s household spending plus a ‘stress test’ for how a borrower would cope if interest rates went up.

The incomes of older people, those aged 50-plus and coming up for retirement, would be particularly put under the spotlight. In effect the responsibility for checking affordability passes from mortgage adviser to lender, and most mortgage sales will have to be advised rather than simply executed.
The FSA’s proposals also stipulate that borrowers will not be able to factor in the possibility of future house price rises, but must be able to show other, more robust ways of being able to pay back their mortgage. In an environment where lenders are already being extremely cautious with their lending criteria and indeed cherry picking there is a danger that by placing all affordability assessments at the doors of lenders’ risk teams, this could create an even stricter lending environment.
For mortgage prisoners in negative equity, there is a ray of hope in the proposals, which suggest that the usual affordability tests are waived for such home-movers provided they have a solid track record of repayments.

However it is not just first time buyers who are suffering, next-time buyers are having it even tougher than first-time buyers, says a startling new report from Lloyds TSB.  It says that the housing market has become the most unaffordable for ‘second-steppers’ in 24 years. Many bought at the peak of the housing market in 2007 but are now unable to move on, having seen the value of their home fall by an average of 23%, leaving them £10,000 in negative equity. The second-steppers, typically aged between 25 and 34, also need to earn more than first-time buyers in order to make their move – and persuade someone to give them a mortgage. In the South-East, the average price of a second-time home means  a second-stepper would have to borrow nearly seven times average earnings – which of course the SA proposals above would not allow even if a lender was foolish enough to offer such a loan..   

Even in the Midlands – the most affordable region for second-time homes – someone trying to move up the property ladder would have to borrow four times their average salary. The home affordability ratio has risen to 5:2 for second-time buyers – the highest level since records began in 1987. The ratio for first-time buyers is 4:1. In 2007, the reverse was the case. The issue of second-stepper affordability is a key one in trying to get the housing market moving again, with the current difficulties in this segment of the market restricting the supply of starter properties for first-time buyers as well as preventing many of those who need to move from doing so.

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