MMR: Existing borrowers cushioned from affordability testing

The Financial Services Authority has outlined plans to ease existing borrowers into new affordability proposals enshrined in the latest Mortgage Market Review consultation paper. proposals.

Under the proposals, affordability checks will have to be carried out for all new mortgage contracts and second charge loans.

However, the industry has been invited to consult on transitional arrangements, including allowing lenders to waive affordability check rules for customers with a good payment history.

Affordability checks can also be waived when rate switching between products with the same lender, changes of term, change of repayment method or adding or taking away a party to the mortgage.

Proposals suggest affordability rules can also be waived if a borrower moves or remortgages with no additional borrowing and the monthly payment is the same or less than before.

Finally, if a borrower's property is at risk and he or she needs a further advance for repairs, the lender can also extend funds without affordability checks.

To honour Treating Customers Fairly, lenders will be expected to offer struggling remortgage customers the same products as other customers and not a separate higher priced set of products. If the borrower does not qualify, appropriate forbearance measures should be applied, it said.

Lenders could be expected to keep a note of whether a mortgage contract was agreed pre-or post-MMR and inform other lenders to help them apply the affordability measures correctly.

Lenders will also need to explain how they intend to keep a record of details for three years, including current balance, term and repayment term for each customer. They will also be expected to monitor and audit the effectiveness of affordability assessments.

AMI broadly welcomed the MMR, but said some of the transitional arrangements would need further reworking.

AMI director, Robert Sinclair, said: "We need to ensure that people do not get trapped on escalating variable rates, unable to access the protection afforded by fixed rate alternatives that might be cheaper in the longer term."

Under the affordability proposals, all lenders will have to assess whether a borrower can repay the sum advanced and demonstrate the mortgage is affordable.

Lenders will have to assess a customer's net income, committed expenditure and basic household expenditure and living costs. Other affordability measures include potential interest rate increases, an assessment on a capital and interest basis and whether the borrower has a credible repayment strategy in place.

The FSA is inviting industry comment on both the proposals and the possible impacts.