Mortgage shakeup will put squeeze on buyers

BORROWERS should this weekend brace themselves for a radical shakeup in the mortgage market which could prevent thousands of consumers buying a home or moving to a cheaper deal.
A housing boom and delinquent mortgage market are blamed as serious triggers of our current financial crisis, which last week saw unemployment rise to 2.47 million.

Watchdogs at the Financial Services Authority are poised to announce, as early as ADVERTISEMENT

tomorrow, a radical shakeup of the mortgage market, which they hope will prevent such a catastrophe striking again. But loans will be much harder to come by, and potentially more expensive.

However, experts warn that precipitate action could choke off any fragile recovery in the housing market. Council of Mortgage Lenders director general Michael Coogan said: "Today's problem is the lack of available mortgage finance. Regulatory intervention is unlikely to reverse this trend and may accentuate the problem."

Self-certified mortgages, sometimes branded "liar loans", where a borrower's income is taken at their word, will effectively be banned, hitting hard the self-employed and those with fluctuating earnings, as well as those who were "imaginative" about their income in a desperate bid to join the house price party during the boom.

Sub-prime home loans which allowed those with a bad credit history to buy a home, and which have all but disappeared anyway, will remain a thing of the past, making any financial indiscretion a disaster from which you may never escape.

Ridiculously high income multiples, which saw borrowers easily qualify for loans of up to seven times their earnings, well in excess of the traditional three or four times ratio, will also disappear. The watchdog had considered imposing strict caps on income multiples. It opted instead for a prescribed affordability test, still based on an element of income multiples but looking closely at all forms of expenditure as well as earnings.

An industry insider said: "On this basis, it is unlikely borrowers could ever expect an advance of more than five times earnings, as an absolute maximum."

The watchdog will also discuss whether compulsory deposits of a predetermined size should be required to qualify for a mortgage, by placing a cap on loans to values, which would see 100 per cent deals banned. However, this appears to have fallen by the wayside in favour of greater reliance on a strict affordability regime.

And buyers can expect to be locked in a room with a branch manager and read the riot act before the loan is agreed, with banks acquiring new responsibilities for ensuring that borrowers understand the risks they are taking on.

Buy-to-let borrowers, or those looking for finance to purchase a second home, will for the first time be subject to the same rules, making such acquisitions far more difficult and expensive.

If it all looks a touch too draconian, it is worth remembering that the EU is in the middle of drawing up a new mortgage directive which could be even more punitive, given the conservative nature of most European mortgage markets.

Nevertheless, the FSA's proposals will bring major headaches for potentially millions who took out self-cert or sub-prime mortgages in the boom years, and who will now find it impossible to remortgage.

The regulator is expected to demand high levels of evidence from all borrowers of their income before an advance is agreed. This will mean salary checks at firms for those who have a job, and at least three years of audited accounts for the self-employed.

Many currently on self-cert arrangements will not be able to provide sufficient evidence to support their current loans, particularly given the impact the recession has had on salaries and the income of small businesses. If their current mortgage becomes hideously uncompetitive and expensive, they will not be able to move to a cheaper lender.



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Credit where it's due: firm revamped payment terms to cope with squeeze

WHEN Seamus Redmond made sweeping changes to his credit terms, the driver was sheer necessity. With €200,000 in bad debts courtesy of the construction collapse, the engineer knew his seven-man flooring company, Renobuild, couldn't withstand many more defaulting customers even though new business is flourishing.

"I've never seen anything to stop as sudden, abrupt, and severe as cash flow," he recalls with a near-shudder.

"We were being paid in 30 days, then it was turning into 90, then people stopped answering the phone. I was putting my own savings into the company to keep the place going."

Inspired by the practices of one of his own suppliers, Mr Redmond changed his standard credit terms from 30 days to a 50pc payment upfront plus a credit card with room to take the rest, or a letter of guarantee from a bank.

Credit insurance, something Mr Redmond admits he hadn't known about before the downturn, was also explored; but he found that door had already closed, leaving Renobuild to plough on alone.

Cutting off future bad debts at the source was only half the battle -- Mr Redmond still faced the challenge of his own creditors who'd gone unpaid when Renobuild's cash-flow dried up.

Believing himself to be "financially a bit of an idiot", he employed local Gorey firm Horizon Financial to run the rule over his company's books.


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