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The credit crunch of a few years ago had a profound effect on the economic conditions within the UK, particularly within the banking sector and, as a result of this, the finance sector of the economy, especially when it came to home owner loans and mortgages.

This left many borrowers in a position where they were unable to keep up with their monthly home owner loan repayments, thereby leading to the inevitable situation of falling into loan arrears and facing the prospect of having their property repossessed.

It was determined that one of the biggest causes of this and the banking crisis which followed, was due to years of irresponsible lending by banks and building societies and people taking out loans which they simply could not afford and had no realistic way of being able to repay.

As a result of this, the financial regulator, the Financial Services Authority (FSA) launched a full investigation into the home owner loan and mortgage market, with a view to introducing new rules and regulations for the loan industry as a whole, which would prevent such a financial disaster happening again in the future.

The investigation has been called the Mortgage Market Review (MMR) and has involved financial experts, lenders and key figures and trade bodies from the loan industry, as well as the FSA, who have all had input into the new proposals.

After several draft proposals for the new loan industry rules, the final proposal for the MMR have finally been published by the regulator this week (Monday 19th December) and has proposed new rules which should put a stop to irresponsible lending practices in the future and ensure that a borrower is able to realistically afford the loan which they are taking out, thereby avoiding loan arrears and repossessions in the future.

The FSA have based the new proposals for home owner loan and mortgage rules on the principle of good mortgage underwriting, which places the onus on banks and building societies, as well as loan brokers and financial advisers, to ensure that their customers are in a viable financial position to be able to afford the loan they take out over the long term, as far as is possible.

The key factor to the MMR, is to check the affordability of any loan before it is approved. This will involve in depth checks on a potential borrower’s income and outgoings, in order to ensure that they can manage the loan repayments, even if interest rates rise, thereby causing the loan repayments to increase.

The affordability assessment will ensure that borrowers will be able to repay their loan in full, without relying on the value of their property increasing to a level where they can use the equity to repay the initial loan.

The assessment will also assume that interest rates will increase at some point in the future and that the borrower will still be able to manage the loan repayments when this happens.

In the original proposals from the FSA, it was suggested that there should be a complete ban placed on interest only loans, as this was a sure sign that the borrower was unable to afford the loan on a full repayment basis and was therefore depending on the value of the property increasing over the term of the loan.

Following pressure from the loan industry, this has now been changed. Interest only loans will now be allowed under the new rules, however, they will be assessed for affordability on the basis of a repayment mortgage loan, unless the borrower is able to prove that they will have the necessary financial resources in place to be able to repay the loan by the end of the term.

One of the key factors from the original draft proposals which has remained in the final plan, is that a lender will have to verify the income of the borrower before the loan is approved and see proof of income in the form of wage slips and P60’s for employed people and three years accounts for those who are self employed.

This effectively places a complete ban on self certification loans and mortgages, whereby a potential borrower is able to give a statement of their earnings to the lender without having to provide any proof of the figures.

The ban on self certification loans comes as no surprise, as these have been abused in the past by individuals artificially inflating their incomes to unrealistic levels in order to get the loan they require, which has then led, in many cases, to the borrower not being able to afford the loan and eventually having their home repossessed.

In the past, many people have used the equity in their home to re mortgage their property as a debt consolidation loan in order to repay more expensive debts, such as personal unsecured loans and credit card debts.

Whilst this will still be allowed in the future, it will be considered a high risk loan, as unsecured loan debts will be secured on the property with the loan usually being paid for considerably longer than the original debts.

In the future, anyone using a mortgage as a debt consolidation loan will have to seek professional financial advice to ensure that they fully understand the implication of securing a loan on their property and the risks that this entails.

There are concerns that the new rules will prevent many people from ever being able to get a mortgage or home owner loan again, although lenders will have the ability to offer loans to existing customers at their discretion, even though they fail the affordability tests.

Despite this, many people who would have previously been accepted for a large home owner loan will now be rejected due to the new affordability rules and whilst this may seem harsh and unfair to some potential borrowers, we have to remember that the whole point of the exercise is to protect loan customers and prevent events like the credit crunch from happening again.

The final proposals from the FSA have now been published for approval and the final rules will eventually be published by the summer of next year, although they are unlikely to come into full effect until 2013 at the earliest.