Earlier today, the Financial Services Authority (FSA) announced plans for a new set of mortgage lending rules to prevent “a return of the risky mortgage lending seen in boom times”.

The new set of rules should prevent homeowners from borrowing more than they can afford and are likely to come in full effect by 2013.

FSA’s latest mortgage market review paper (pdf, 2.4 MB) outlines the need for all prospective borrowers to get the right information and advice. It also aims to ensure that mortgage lenders will be assessing the affordability of loans more effectively and be thoroughly checking each applicant’s ability to keep up with their mortgage repayments.

Existing borrowers who might have been prevented from remortgaging will also be allowed some degree of flexibility to manage their lending terms under the new mortgage lending rules.

According to the three key proposals of “good mortgage underwriting”, as explained by FSA, borrowers should avoid assumptions on future house prices and lenders should assess long-term affordability. The three key proposals specifically state that:

• Mortgages and loans should only be advanced when the borrower can afford repayments without relying on future house price rises.

• Every affordability assessment should take into account any future changes in interest rates with a minimum five-year outlook and borrowers should not enter contracts based on the assumption that the initial interest rates will not change later on.

• Interest-only mortgages should be assessed no differently than repayment mortgages unless the borrower has a viable option to pay off the loan that does not rely on the assumption that house prices will rise.

Chairman of the FSA, Lord Turner commented on the proposed rules:

“We believe that these are common sense proposals which serve the interests of both lenders and borrowers. While the excesses of the pre-crisis period have largely disappeared from the current market, it is important to ensure that better practice endures in future when memories of the crisis recede and the dangers of poor practice return.”

“The three key proposals are, we believe, the most effective way to tackle the problem of risky lending. But it is essential that we understand what their impact would be – how many consumers would be protected from the distress of arrears and repossessions, and, how many consumers who could have afforded a mortgage might have to take out a smaller mortgage or to delay their purchase.”

“The estimates are inherently uncertain, but they suggest that the new rules would have only a marginal effect in current market conditions – and particularly so for first time buyers – but would act as a significant constraint if market practice were in danger of returning to the 2005 to 2007 pattern. That pattern of effect would be a highly desirable one. We are however particularly keen that lenders provide their detailed assessment of the likely impact of these proposed rules. Then the FSA will be able to make appropriate final decisions.”

“The proposals published today reflect the ideas and input of many stakeholders, including consumer groups and lenders. We believe these proposals will hardwire common sense standards into mortgage lending and guard against the risky lending practices of the past – leaving most borrowers unaffected, but better protected.”

The FSA Board will make a decision on the final form of the new mortgage lending rules in summer 2012.

This year’s Christmas period will see almost one in three Britons slip into some form of debt to fund their holiday spending, according to an online survey on Christmas spending by YouGov. (pdf, 815 KB)

The online survey was conducted on behalf of Halifax and yielded some very interesting, if not alarming, results. According to the survey, the average person in the UK plans to spend nearly £38 on gifts for each loved one, with women planning to buy gifts for 10 people whereas men will give gifts to seven people on average.

Despite the financial crisis it seems that only 31% of the people surveyed have cut back on Christmas spending compared to previous years while 32% have increased their spending, with many of them going into debt to fuel their holiday purchases.

YouGov’s latest survey also found that more than 52% of the consumers do not save any money for their Christmas spending, while only 14% of the people surveyed said that they save money throughout the year to fund their Christmas spending.

Arguably the most alarming fact is that 31%, almost one in three, will go into debt to fund their Christmas spending, with 10% using their credit card to buy presents and planning to pay the money back later.

This year in particular more people than ever consider taking out a payday loan and 20% of all UK adults who plan to buy Christmas presents believe they will need to directly borrow money to pay for some of their purchases.

Rob Wood, Head of Halifax Savings, commented on the survey’s results: “It seems Christmas spending has not slowed down as we head into the holiday period and only a small number of people have felt the need to save throughout the year to cover the costs. It is encouraging, however, that most consumers will have the money [upfront] to cover the costs of Christmas presents. Christmas can be a tough time financially for families and advanced planning and saving is the best way to ensure there is enough money to go around for all the extra costs.”

Loan expert Tim Moss at MoneySupermarket.com also commented: “This year has been incredibly tough for consumers with the rising cost of living really hitting the nation’s wallets hard. It comes as no shock that such a high number of people will be tipped into debt this festive season, particularly as Christmas is a time when people generally increase their spending. With many people also being paid early in December, January payday may seem a long way off, so planning ahead is vital to avoid carrying over the debt burden into next year.”

Addressing the less financially secure people, Tim Moss added: “For the large number of people who are unable to save, there are a number of ways they can reduce the Christmas spending hangover by the New Year, and it is essential to use the right product to meet their needs. For example, a credit card offering zero per cent interest on purchases might be the sensible option if they are able to pay off the balance in full within the zero per cent period. Dipping into the unauthorised overdraft may prove costly for those unable to pay this off, particularly as the charges for dipping in the red may not hit until January.”

Payday loans are small, unsecured loans with sky-high interest rates, aimed at people who struggle to make ends meet each month until their payday.

Payday loans usually range from £300 to £1000 and since they are supposed to be short-term their interest rates can soar up to 30% or more for some providers. This translates into sky-high annual percentage rates (APR) of 3,000%, 4,000% or more!

3.5 million Britons are considering taking out a payday loan within the next six months, according to a recent research by insolvency trade body R3.

R3, also known as the Association of Business Recovery Professionals, “promotes best practice for professionals working with financially troubled individuals and businesses”. R3’s insolvency practitioners have been raising concern about payday loans and a new kind of “zombie” debtors who only pay the interest charges on their debt and not the debt itself.

R3 president Frances Coulson commented on the issue of payday loans voicing his concerns:
“Payday loans are not the best way to resolve debt struggles. We know that many who take them out find them to be a negative experience, often escalating financial troubles.”

“We hear talk of ‘zombie’ businesses, but seeing individuals run their finances in the same way is troubling. ‘Hanging on’ each month simply cannot be maintained forever. This group will have very few options should interest rates rise or their circumstances change.”

“Having a financial buffer is crucial to weathering periods of difficulty. If struggling to payday becomes a regular occurrence, seeking financial advice should be a priority over short term high interest credit. ”

Of the 2,000 people interviewed by R3, 45% struggle to make their money last until their payday while 60% of those who had taken a payday loan have already regretted the decision. Moreover, 48% claim the payday loan had negative impact on their financial situation and only 13% believe their payday loan impacted positively on their finances.

According to house equity withdrawal (HEW) data released by the bank of England on Wednesday, households are paying back a record amount on their mortgage.

During the second quarter of 2011 alone, consumers paid back £9.1bn on their mortgages, amounting to 3.5% (-3.5% of HEW) of their post-tax income. This is the largest figure ever paid back in a three-month period since the Bank of England started collecting data.

To put these figures in perspective; in late 2006, house equity withdrawal had peaked at 5.6% of post-tax income, as compared to -3.5% from April to June of 2011. Simply put, house owners were remortgaging their properties a lot more before the recession.

Today, as home owners are cutting back on spending and house prices continue to fall, remortgaging does not have the appeal it had during the “boom” years. Since June of 2008 a grand total of £92.9bn has been paid back instead of being spent by home owners.

An article by Kate Reinold of the Bank’s structural economic analysis division (.pdf, 70 MB) published with the 2011 Q2 Quarterly Bulletin explained that the fall in HEW since the recession is “likely to reflect a fall in the number of housing transactions, with little sign that households in aggregate are making an active effort to pay down debt more quickly than in the past.”

IHS expert Howard Archer said: “The record net injection of housing equity in the second quarter points to a strong desire and perceived need of many people to improve their personal financial balance sheets given high debt levels and serious concerns over the economic situation and jobs.”

“Furthermore, extremely low savings interest rates have made it much more attractive for many people to use any spare funds that they have to reduce their mortgages. In particular, many people may be using the extra money that is resulting from their very low mortgage interest payments to reduce the balance that they still owe on their houses.”