MMR: Transitional arrangements will fail non-standard borrowers

Analysts suggest interest-only, adverse credit borrowers who don't qualify for transitional arrangements will suffer the most if they try to remortgage without a repayment plan in place.

The Moody's report said: "In a rising interest rate environment, the borrower would either have to pay increasing monthly payments on their current loan, refinance to a lower interest rate loan - if any are available - or qualify for a transitional arrangement."

Under proposed new rules expected in 2013 at the earliest, self-certified mortgages won't exist and all borrowers will be expected to fully verify their income, a move Moody's also called ‘credit negative.'

Moody's suggested interest-only borrower's affordability would be further stretched by a likely Bank Base Rate rise in 2013 and capital and repayment affordability checks is the borrower doesn't have a repayment vehicle in place or fails to qualify for transitional arrangements.

Although, Moody's added, house price and wage inflation could act as a counterbalance.

Ian Gray, mortgage manager at Largemortgageloans.com, said there hasn't been an adverse credit market in any real sense since 2007, but the FSA is still right to regulate.

"It is valid to write these restrictions into the MMR because certain lenders are still champing at the bit for a thriving, sub-prime market again. As soon as the credit markets become more liquid the market will come back," he said.

The FSA is also right to ban self-cert mortgages, added Gray, saying they were "liar loans."

"It takes more work to prove income, but you have to look deeper into the applicant's affairs. Every day of the week I arrange loans with private banks where the client's affairs are offshore in a tax efficient structure or on a company balance sheet. The regulator should never tell us how or with which documents, but there is always a way to prove cash-flow if you look for it."

The regulator's proposed transitional arrangements for current borrowers will allow some applicants to refinance under set conditions even if they fail stricter new lending criteria. Applicants cannot borrow more, unless it's for essential repairs, including further advances, or make any major changes to the mortgage contract. The borrower must also be up to date with all payments over the last 12 months.