In the final Mortgage Market Review rules published this morning the Financial Services Authority has relaxed its view of how lenders treat these borrowers.
The FSA said: “We agree that it would benefit borrowers to have more flexibility than was permitted in the original proposals.
“For example, we can see that borrowers may benefit from taking on higher payments to fix their rate in periods where interest rates are expected to rise.
“Similarly, we can see that they may benefit from some material variations to a mortgage, such as a change in term.”
The final MMR rules simplify when an affordability assessment is required for all existing borrowers when they make changes to their existing mortgage – either as a contract variation, or as a new replacement contract.
They also only require an affordability check where there is additional borrowing or a material impact on affordability.
And the FSA is allowing lenders to make their own assessment about making exceptions to the affordability and interest-only rules.
But the FSA warned: “Despite this change there will be situations where the responsible lending rules continue to bite for existing borrowers.”
It said these circumstances include where there are material changes to affordability; the borrower does not have an acceptable repayment strategy for an interest-only mortgage; or the borrower wishes to move their mortgage to another lender.
The FSA said: “We recognise that in such scenarios while an affordability assessment should apply because there may be a material impact on affordability there may be some situations where, due to extenuating circumstances, such a change may be in the interests of the borrower and lead to a better outcome than remaining in their current situation.
“We also recognise that it is not possible for us to predict every such circumstance in the rules.”
The FSA said lenders must judge that the proposed transaction is in the customer’s best interests.
“We do not believe that it is appropriate to make these transitional arrangements compulsory,” added the FSA. “Ultimately it is for lenders to make lending decisions and there may be sound reasons for not proceeding with individual transactions.”
A further rule preventing lenders from treating mortgage prisoners differently from any other customer is being introduced with immediate effect – 18 months ahead of the implementation deadline for the rest of the MMR.
The FSA said: “In response to feedback, we are strengthening the protection for existing borrowers, by changing the guidance to an evidential provision (MCOB 11.8.1E).
“Under this provision if the existing lender takes advantage of a ‘trapped’ borrower or treat them any less favourably than other customers with similar characteristics – for example by offering less favourable interest rates or other terms – then this may be relied on as tending to show contravention of Principle 6.”
