The Financial Services Authority has said respondents to earlier consultations generally agreed that an assessment of expenditure should form part of the affordability assessment, but many thought that the proposed requirements were “much too prescriptive and over-engineered”.
The FSA paper said: “Many respondents also thought that we did not take enough account of a consumer’s ability to manage expenditure once they had taken on a mortgage, for example by prioritising mortgage payments over discretionary expenditure such as holidays and recreation.”
The regulator has consequently changed its approach saying “it is apparent that there is no need for us to be as prescriptive as we originally intended”.
It said many lenders have applied and continue to apply a sensible approach to assessing household expenditure and the FSA would like to see is a consistent application of that good sense across the market.
To help ensure this, its proposal now is that when assessing affordability a lender should, as a minimum, take explicit account of:
• the committed expenditure of the applicant, such as credit and other contractual commitments that will continue after the mortgage is entered into; and
• the basic essential expenditure of the applicant’s household. This can be based on statistical or modelled data. It must cover the bare essential expenditure required to maintain the household’s basic needs and to live in the property which cannot be reduced, including heating, water, council tax and buildings insurance.
The FSA is proposing the lender must also consider basic quality of living costs which are hard to reduce, such as clothing, household and personal goods, basic recreation, and childcare.
The current mortgage rules require a lender to do nothing more than ‘take account’ of a borrower’s ability to repay their mortgage.
The FSA paper added: “Our assumption about firms managing their credit risk responsibly has been shown to be wrong in many cases.
“There is a general consensus that a key problem underlying many issues in the mortgage market has been firms’ failure to perform proper affordability checks, relying instead to a significant extent on the underlying collateral and an assumption that debt burdens were likely to fall with continuous property price appreciation.”
The FSA estimates that the affordability rule will affect only 0.04% of borrowers in subdued conditions, increasing to 3.6% of borrowers in a boom period.
It said that within the relatively small group of borrowers affected by the affordability assessment, those borrowers most affected are those who would have self-certified income (21.8% in a boom period) and those with an impaired credit history (66.9% in a boom period).
The self-employed would also be more affected in boom conditions (7.3%), reflecting the fact that the self-employed tended to use self-certification and are more likely to have an impaired credit history.
First-time buyers would be hardly impacted at all in today’s subdued conditions and only slightly impacted in boom conditions (less than 3%), said the FSA.
The Bank of England reported that in 2010, 50% of households with a mortgage struggled to pay their bills at least from time to time of which 15.5% were constantly struggling or falling behind on their commitments.
