What are the FSA new rules on mortgages – and how will you be affected?

Over recent months, the Financial Services Authority (FSA) has been conducting a review of the current mortgage market. The FSA’s Mortgage Market Review (MMR) has now been published and contains many proposals which will alter the way the UK’s mortgage market operates in future. One key part of the review concerns the mortgage market, with FSA new rules on mortgages. Keen to ensure that high net worth finance clients with large mortgages are treated differently, the MMR contains several specific recommendations.

High net worth clients will be able to opt out of advice

The headline of the FSA’s Mortgage Market Review is that the income limit of a ‘high net worth’ mortgage customer has been cut from £1m to £300,000.

In its consultation paper in 2011, the FSA defined a high net worth mortgage borrower as someone with a minimum annual net income of £1 million and net assets of £3 million. The regulator also proposed that high value mortgage clients could opt out of advice, take out a large mortgage on an interest only basis and it provided for a tailored approach to disclosure.

And, the FSA’s definition of a high net worth mortgage client is also different to the one the regulator put forward in its consultation paper on unregulated collective investment schemes in August 2012. In that paper it defined ‘high net worth’ as anyone with net income of £100,000 and net assets of at least £250,000. However, Mortgage Strategy reports that the FSA is now choosing to apply a different definition of ‘high net worth’ in the mortgage market.

In the final rules it states: “Our changed approach, in the light of the market feedback, recognises that there is a very small subset of genuinely wealthy customers, whose wealth is significantly above average.

“This level of wealth gives these customers specific advantages, in particular, a considerably reduced risk of becoming homeless in the event that they experience financial difficulties.”

“The HNW definition for mortgages will therefore exclude most customers, and will ensure that the tailoring is targeted at the most wealthy.” The rules also mean that individuals and entrepreneurs can opt out of advice in favour of an ‘execution-only’ sale. To qualify for this exemption, clients must confirm in writing that they have been made aware of the consequences of losing the protection afforded by an advised sale and have chosen to proceed on an execution-only basis.

Hugh Wade-Jones, director of London mortgage broker Enness Private Clients, welcomed the proposals. He said: “It’s pleasing that the FSA understand that high value mortgage clients have different needs and that rules governing most lending won’t necessarily apply to people with large mortgages. High net worth clients often have complex income or ownership structures and a ‘one size fits all’ approach to the mortgage market clearly would not have worked for these clients.”

Mortgage Strategy reports that lenders will still have to assess the affordability of high net worth mortgage customers and obtain evidence of income when basing their affordability assessments.

Mr Wade-Jones added: “While high net worth clients will be able to opt out of advice, we encourage everyone to speak to a professional London mortgage advisor before taking out a large mortgage, so you can gain the best understanding of the FSA new rules on mortgages.”

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