The FSA (Financial Services Authority) has shown initial signs of loosening up the stringent affordability criteria that lenders use to assign mortgage rates in the hope of making owning a home more affordable and practical.  The new move by the City watchdog is just one step towards its complete overhaul of the new mortgage market.

Originally the FSA stated that they would forcibly make lenders assess all mortgages based on if the borrower could afford the assigned mortgage rate based on a twenty five year repayment period regardless of the actual length of the loan or if it would be an interest only mortgage.  However, today it seems that the watchdog may be rethinking its strategy as they announced that this may not be practical since there are many individual circumstances that potential lenders face that the new regulation will not allow for.

The FSA explained that they have taken a closer look at the ‘one size fits all’ theory and realized that they need to consider how advantageous the simple approach would be when compared with the disadvantages that the inflexible plan would create.  They added that they will not be banning interest only mortgage rates as was once thought to be the case, but lenders will still have to consider if the borrower could afford a credible repayment plan before they decide to grant the mortgage.

Continuing with the development of the Mortgage Market Review, the FSA will also be placing a large responsibility on lenders to make sure that all borrowers will be able to keep up with their repayment plans against the expected rise in interest rates.  This is due to the fact that the watchdog blames poor lending practices to the major banking meltdown and the number of foreclosures that have occurred over the past few years.

In a separate report by the Bank of England referenced in the FSA announcement, it was stated that around 18% of borrowers consistently missed their monthly repayments or struggled with other bills due to the fact that their mortgages were not affordable.

In the three months from April through June of this year mortgage holders have reportedly reduced their overall debt level by roughly £6.2 billion, the largest influx of funds ever recorded by lending institutions in recent history. This trend is expected to continue into the coming quarters as well even though mortgage rates are anticipated to continue a relatively low trend going into the winter months.

Many are attributing the recent trend for existing home owners reducing the number of remortgages being sought and first-time buyers seeking to defer home purchasing to the rising costs earlier this year and various economic instability factors. Many other experts, however, feel that it is not simply these factors that are playing a major role in determining both the current situation and future of the property market but instead the fact that lending institutions are leaning more towards restrictive measures that will make obtaining a mortgage in the first place all but impossible for those without perfect credit scores and large amounts of disposable funds at the ready for personal use.

In addition to higher lending restrictions being put in place on consumers credit agencies have also reportedly been looking into adjusting credit score calculations given the growing number of consumers who are shifting more towards debt repayment rather than increasing spending. When coupled with the fact that interest only mortgages – a necessity for many new home owners to be able to afford a home purchase in the first years of entering into the real estate market – this creates a financial vortex that prevents many individuals from being able to both develop financial stability and establish themselves as desirable consumers to real estate lenders.

One thing is generally agreed upon by experts across the UK, though – the housing market is not looking at developing in any measurable positive way in the coming months and consumers should not expect to see any major positive trend in the coming quarter or two going into 2011.

Anticipated cuts to the Local Housing Allowance (LHA) are seen by many to potentially be a major blow to the recovery effort of many economic areas, while some 800,000 current beneficiaries of the LHA would be forced to move away from areas of high job zones that may assist them in getting back on their feet after the economic crash caused widespread disturbances amongst many industries.

This affected individuals are generally those that have been particularly hard pressed due to unemployment and other financial strains and are unable to receive additional funding for housing for a variety of reasons, even bad-credit mortgages based upon the current low mortgage rates due to stringent lending institution policies. This has resulted in a boom in LHA recipients in recent months.

The change, capping LHA at 30% of standard rents, is seen by many recipients and the British Property Foundation (BPF) as a move that would effectively put many out of their current residences in high-job neighbourhoods and force additional economic difficulties on many individuals currently requiring assistance in many areas. When coupled with the ongoing difficulties of many organizations in receiving commercial mortgages to expand businesses in some areas this could add greater strain in many regards.

Whether or not this will have a lasting impressing on the overall economic recovery effort in some areas is still undetermined, however many experts feel that high-job districts such as those found in most major cities (especially London) will be receiving the brunt of the change and have particular difficulties in adjusting accordingly as more and more of the low-income workforce is forced to seek assistance in other less expensive areas and thus prevent a widespread recovery for the majority of impoverished individuals across the nation.

As the markets continue to shift and speculations of an interest rate hike are on the rise many people have shown some concern over selecting tracker mortgages rather than locking-in to a fixed-rate mortgage despite the traditionally higher costs associated with a fixed-rate deal. At the same time, however, the current long run of historically low interest rates by the Bank of England has also kept many people in check away from steering purely towards fixed-rate options as reports indicate that the Bank intends to continue the lower rate for the time being despite the fact that excess inflation may force the bank to edge rates higher in the future.

In lieu of the current market unrest looking at both fixed and tracker deals a number of lending institutions have been revising their lending patters for both residential and commercial mortgages alike, with many highly favourable rates being seen in recent offers. In fact assuming that a 20% down payment may be possible on a home purchase and a short-term mortgage is a viable option some offers have been seen around the country showing an interest rate as low as 2.85% on a fixed-rate deal – something that may not be possible under most other options even offered by tracker mortgages.

Of course the stipulation behind locking-in such as low rate is that a significant enough of a down-payment must be made initially for the purchase. This can be a highly limiting factor for many people as a 20% down payment on many homes in many areas is simply beyond what they could afford at the time. Additionally longer mortgages outside of the 2-year range carry with them higher rates as well due to the higher potential for the central bank’s interest rate to increase over that period of time while shorter term deals may simply be too difficult for many people to handle with their current incomes, therefore consumers are cautioned to weight out all deals fully before committing to one.

Recent reports indicate that many first-time buyers throughout the country are still struggling with entering into the housing market, facing troubles particularly in terms of financing an initial purchase due to high down-payment requirements. This has been a long-term issue beginning several months ago and is growing in momentum in recent months despite the continued stamp duty holiday made available to first-time owners throughout the UK.

The primary driving factor behind many first-time home owners finding it difficult to enter into the market is that in order to secure a low mortgage rate on a home purchase – either through a fixed-rate mortgage or a tracker mortgage – a significant down payment is necessary from virtually all lenders. While this hasn’t been as much of an issue in previous decades the recent boom experienced in the housing market throughout the country has led many people to simply be unable to afford the initial down payment necessary to finance their home, even in more rural areas where housing costs are traditionally significantly lower than more urban areas.

When combined with the growing acceptability of simply renting rather than owning a home of their own this is adding additional strain to the real estate market in many areas as individuals move more towards long-term rental agreements – generally good news for the buy-to-let industry, however in this area many investors are seeing problems of their own as lending institutions regularly tighten down regulations that are preventing many owners from developing rental markets further.

With any luck if this trend continues additional buy-to-let options will be made available in many areas, however at this time many experts are expressing concerns over long-term sustainability of this trend as individuals shift market focus and developments are stagnated in some locations.

Interest only mortgages are quickly becoming a thing of the past according to latest reports from lending institutions throughout the UK lately, with more than one million current interest-only mortgage holders potentially facing sharp price increases when their current deal expires. This report comes on the back of the Coventry Building Society becoming the latest in mortgage lending institutions to no longer offer interest only mortgages to first-time buyers due to the higher risks involved in deals as of late despite the continued low mortgage rates supported by the central banks.

Between 2005 and 2009 it is estimated that roughly one million home owners throughout the country actually opted for one of these mortgage options during the housing booms in order to secure additional capital by limiting their own monthly payments, thus allowing them to purchase more costly homes than they may be able to otherwise purchase under fixed-rate mortgage or other financing options. Typically interest only mortgages  were also offered along with various repayment vehicles as well, such as endowment agreements or other anticipated funding sources in the future.

With the recent instability of housing prices in many areas, however, many lending institutions are becoming leery about offering interest only mortgages to many finance seekers, and over the past few months interest only deals have been slowly becoming a thing of the past. This is particularly troublesome for many first-time buyers that may need the lower monthly costs interest only deals offer to allow them to purchase a home in some areas even with the continued stamp duty holiday.

Many economic experts anticipate interest only mortgages becoming rarer and rarer over the coming months as lending institutions continue to adjust their policies to accommodate the shifting real estate market prices in many areas and limit their own potential losses should economic hardships come again.

According to the latest figures issued by the Global Property Survey from the Royal Institution of Chartered Surveyors, commercial real estate in emerging economies has performed better than their counterparts in both the UK and the Euro zone during the second quarter of this year despite continued low mortgage rates and favourable fixed rate mortgages offered on the properties.

The very dynamic economies of Eastern Europe, Asia and South America have seen fast rising demand in their property markets, according to the new figures.

Across the world generally, occupier demand is climbing, although exceptions to this are seen in the Euro zone and in the UK where stringent fiscal deficit reduction measures seem to have impacted, reducing the enthusiasm of businesses to snap up new space.

France has, however, gone against the grain of negative Euro zone performance, and has displayed definite signs of an improving sentiment towards real estate. According to the report, this is also in line with the comparably strong performance of France’s domestic economy. Also, investors in the US recorded climbing tenant demand in all three property sectors for the first time in three years.

In terms of rising occupier demand, the way is being led currently by Brazil, with demand rising from 70% to 85%. Markets in China and Peru are currently also performing well.

Conversely, the UK has seen negative demand for the first time in 12 months, with the net balance dropping from +14% to -4%. For the Euro zone, the net balances of Greece, Spain and Germany all dipped into negative territory.

For the first time in a year, transactions dropped in the UK, with solicitors recording a fall in activity from +24% to -5%. A drop and then a rise was seen in both the UAE and Greece.

Activity in China still appears to be strong, even in the wake of policies implemented by the Chinese government to tackle the property boom. All indicators for rental expectations and occupier demand as well as the number of bidders for every property are still all in definite positive territory.

India has also shown strong second quarter real estate performance-even in the wake of interest rate rises.

According to Simon Rubinsohn, Chief Economist at the RICS, the outlook for third quarter looks to favour the emerging ecomomies.

‘The real estate world continues to be split broadly speaking between the emerging and developed economies. Strong growth in many of the former, including the likes of Brazil, Hong Kong and India, is continuing to boost demand for new space from occupiers as well as encouraging investment activity. Meanwhile in many of the latter, fiscal retrenchment allied to bank deleveraging continues to place significant obstacles in the way of a meaningful recovery in the commercial property market,’ Mr Rubinsohn said 945CZEPQRPDT.

According to new research published this week the demand for rented accommodation climbed to new record levels in the second quarter of this year. The research from Britain’s largest lettings agent, Countrywide, indicated that some 50,480 people looking to rent properties registered with them during the three month period up to the end of June. This figure represents the highest recorded by Nationwide since the company began collecting such data back in 2003. The figure is also 16% up on demand during the opening three months of 2010, according to the research.

Demand was especially marked in June, when more than 18,000 new tenants registered in order to rent accommodation. This figure represents the highest ever level recorded in a single month, and is also up 22% on May’s figure. The rise in the number of potential rental tenants contrasts with a drop of 6% in the actual number of properties available for rent during the same period. Due to this, there are currently on average 5.5 tenants in competition for each property, a figure that has risen from 4.9 tenants for each property during the opening quarter of 2010 – boding well for the mortgage rates in the market as well as buy-to-let mortgage rates in particular as the lending shows to be more secure. Even fixed-rate mortgages should show strong promise in some ways for areas with decent growth and interest trends.

In the south-west, two-bedroom properties are the most in demand with more than 23 people competing for every available property.

According to Countrywide, the supply and demand imbalance has resulted in a “slight increase” in rents-especially where houses are concerned-and the average rental cost for a four-bedroom home has climbed by 4% for the quarter to £1,090. The research also shows that properties are currently being taken within a two-week average, which is six days faster than in the last three months of last year.

According to John Hards, the co-managing director of Countrywide Residential Lettings, demand has spiked beyond all expectations and is set to rise still further. "Student demand for private rental accommodation will increase further with university applications at record levels.

"The buy-to-let sector remains a good source of investment, however, the Government needs to do more to incentivise new landlords in order to appease the current shortage of properties.

"If tenant levels continue to rise at the same rate, this will be further exacerbated," he stated.

It appears that new rules set to be implemented by the Financial Services Authority (FSA) will make it more difficult for consumers to obtain mortgages and there are some rumblings that the strict new regulations actually go too far – bad news for many first-time buyers and bad-credit mortgage seekers. The FSA was all set to be axed by a potential in-coming Conservative government, and was only saved due to the fact that a coalition Lib/Con government was actually voted in instead.

In the wake of its reprieve, the FSA has begun to throw its weight around with regards to the mortgage market and regulations. The FSA recently released new proposals intended to cleanse the mortgage market and curtail irresponsible lending practises. They also aim to ensure that borrowers are able to afford the mortgages they sign up for.

Despite the seeming logic behind the proposals, there have been warnings from within the industry that the new proposals will make mortgages more expensive and, as a result, will price many people out of the mortgage market. Among the new FSA proposals is the requirement for income verification on all mortgage applications. This will lead to an end of self-certification mortgages. It may seem incredible that mortgage lenders negated to investigate the income status of their borrowers before approving lending, but FSA figures released at the end of 2008 reveal that an amazing 52% of mortgages were approved without the borrower’s income being fully verified. The FSA also believe that additional affordability tests should be implemented for all mortgage products to make sure that borrowers only take on packages they can afford. This would also ensure that lenders are finally responsible for verifying a borrower’s ability to repay.

Lenders and brokers have criticised the proposals, arguing that they are likely to make mortgages too expensive, thereby pushing them out of the reach of many people. Due to the stringency of the new affordability checks, borrowers will need to provide independent proof of income, and lenders will have to take more time to authenticate the documents. Such extra checks will, of course, cost companies more money. As a result, costs will be passed on to customers, thereby paying lenders for doing what they ought to have been doing all along.

Some also feel that the criteria are so stringent that they are likely to limit access to finance. The new FSA rules would lead to lenders assuming that borrowers will take mortgages on a 25-year term capital repayment basis. Many first-time buyers, however, are likely to opt for a longer term for a first mortgage to make sure it is affordable. The new ‘one-size’ regulation may squeeze the margins too far, according to the Council of Mortgage Lenders: “The FSA’s proposed conservative approach may trap struggling households in their existing mortgage, eliminating the possibility of re-mortgaging to a cheaper deal. That option may be the difference between clawing their way out of their money troubles and retaining ownership of the home, or falling deeper and deeper into arrears until the home is repossessed.”

One of the UK’s major investment services has issued a stark warning to Britain’s mortgage market, stating that mortgage lenders in the UK are likely to suffer continuing periods of difficulty as a result of house price uncertainty, unemployment fears and interest rate issues.

Moody’s Investor Service also stated that banks and building societies are also likely to face more and more stringent liquidity and capital requirements, two factors that could well diminish their ability to raise lending levels. The lack of wholesale funding is likely to continue the squeeze for many, heaping more and more pressure on them to scale back on loans – not only for this year, but also beyond. As well as this, current arrears on mortgages have, until now, been softened by the continuing very low interest rate levels as well as the relatively small climb in unemployment. The agency also stated that any rise in either interest rates or unemployment ‘would have a significant impact’ on loan performances.

"Moody’s believes that the next few quarters will be characterised by a number of key credit themes that will culminate in sustained pressure on the sector’s profitability," stated Marjan Riggi, VP-senior credit officer. "We expect to see continued consolidation of weaker lenders into larger and stronger entities, thereby strengthening the system in the long run."

Moody’s categorised UL lenders based upon its analysis of their franchises’ strength. The larger market firms, such as Nationwide, Santander and the Co-operative Bank, which all benefit from economies of scale and also provide a wider range of products, were seen as better placed. Conversely, the opposite end of the market was occupied by the more fragile lenders such as building societies like Newcastle and West Bromwich, largely due to their lack of scale, as well as the fact that some in the group were also held back by poorer quality assets following their fast growth.

Building societies have been especially hard hit following the credit crunch due principally to the fact that they are competing against the much larger state-supported banks that are more often perceived as safer by many customers.

Societies have been particularly hard hit since the credit crunch as they are competing for customers’ deposits against larger state-backed banks, often seen as safer by consumers such as those looking for secure fixed-rate deals.