The 20% ‘buffer’ could be put in place to guard against debt that does not show up in credit records and protect borrowers from getting into payment difficulties in the future.
The loans cap would mean a credit-impaired customer assessed to be able to afford monthly mortgage payments of £1000 would only be allowed a mortgage with monthly payments of £800.
The FSA said a 20% restriction was appropriate despite finding that, on average, credit impaired borrowers were in arrears by 14% within the first two years of their mortgage.
Ed Harley, head of mortgage policy at the FSA, said: “Stricter affordability assessments will apply to credit impaired borrowers and it will reduce what lenders are willing to lend. A buffer allows more scope for repayment difficulties, as we are conscious that such borrowers have other financial commitments. We haven’t decided what the right level of buffer will be, but 20% seems right.”
However, Paul Broadhead, head of mortgage policy at the BSA, warned that the proposal needed serious thinking through to prevent it killing off the sub-prime market by restricting borrowers from remortgaging or accessing a mortgage:
“Coming out of the deepest recession for generations, we are going to see an increasing number of people without a super-prime credit rating, because the number of currently unemployed people (which will increase as a result of public sector cuts) means many could have adverse credit on their records through no fault of their own.”
Jonathan Cornell, communications director of First Action Finance, said: “We need to try to prevent people getting into payment problems, and it is a fine balance to make. This will penalise a lot of people by treating them all the same and is not a natural solution.
“However, the FSA is taking a very tough stance and is aware that the MMR will deny a lot of people access to mortgages.”
The market has until 16 November 2010 to give feedback on the proposals.
