Q&A: new FSA mortgage rules New rules for the mortgage market aimed at preventing a return to risky lending have been published by the Financial Services Authority (FSA), following a three-year consultation. FT Money looks at what the new rules, most of which take effect in 18 months, mean for you. What are these new rules all about? The regulator first began looking at reforming the mortgage market three years ago, following concerns that borrowers were being lent money that they could not afford to repay. It has published a series of consultations looking at how to change the way banks and building societies lend money, culminating in its final set of rules published on Thursday. Who will it effect? The new rules will effect both future homebuyers and existing mortgage borrowers. People looking to buy their first home will find it harder to get a mortgage now than it would have been a few years ago. Newly self-employed borrowers will find it harder to get a loan. Existing borrowers will also have to meet the new requirements - many of which may find they do not meet the new tougher criteria being used by lenders. What do the new rules say? All mortgage borrowers will need to prove their income, rather than just telling their broker or lender what they earn. This effectively puts an end to self-certification mortgages, where borrowers did not need to prove their income. Dubbed "liar loans," these products became popular during the housing boom. The FSA estimates that as many as half of all new mortgages in 2007, the peak of the housing market, were sold without any income verification. Making sure people only borrow what they can afford is at the heart of the regulator's rules. Lenders will need to take into account a borrower's commited and basic expenditure, and consider whether they can still afford the mortgage if interest rates rise over the next five years. Another key change is related to interest-only mortgages, loans which do not require borrowers to make capital repayments each month and are therefore cheaper. The FSA is concerned these were sold to borrowers who had no way of repaying the capital at the end of the mortgage term. Its new rules stipulate that interest-only loans can only be sold to borrowers that have a credible repayment strategy, such as savings, investments or bonuses - rather than speculative strategies such as relying on future house price growth or uncertain inheritance payouts. Other changes will result in most borrowers being required to get advice to take out a mortgage, apart from when applying for a mortgage online or through the post. When will it come into effect? The new rules officially come into effect in 18 months time on April 26 2014. However, most of the new rules have already been implemented by lenders over the course of the past three years. It is much tougher to get an interest-only mortgage now than it was before the economic downturn. Most lenders have tightened up their criteria and now state which repayment vehicles they will accept, while others, such as Nationwide Building Society, have stopped offering interest-only loans to new customers. This is why most experts say the final rules are unlikely to lead to change in the current lending environment. How will the affordability tests work? A lender will consider how much a borrower spends each month on essential household expenditure - such as heating and council tax - basic living costs and other debt commitments when deciding how much it will lend to a borrower. Most banks have already started to do this since the downturn. The FSA has stopped short of insisting that banks also consider how much a borrower typically spends on discretionary spending such as going out and holidays when assessing affordability, which it initially proposed. Will I still be able to get an interest-only mortgage? Yes - but only if you can provide credible evidence that you have a strategy in place to repay the capital. This can be in the form of a repayment vehicle, such as the sale of a second home or savings in an Individual Savings Account (Isa), or from regular payments of income such as bonuses. Relying on hopes of rising property values or uncertain inheritance will not be allowed. Existing borrowers will find that many banks will no longer offer interest-only on high loan-to-property ratios. Most have limited the product to about 75 per cent of the property's value, while some lenders, such as Santander, have restricted interest-only to those borrowing a maximum of 50 per cent of the property price. What if I have a mortgage but can't meet the new criteria? The FSA has introduced "transitional" arrangements to help existing creditworthy borrowers that might not be able to move home or refinance as a result of these new rules. These changes come into effect immediately. Lenders will be allowed to waive the new affordability rules for existing borrowers that have met repayments for the last 12 months and have not fallen into arrears. The transitional arrangements only apply to borrowers who are seeking to borrow the same amount or less, not those who want to borrow more. These borrowers will be able to apply for a new loan through either their existing mortgage lender or a new bank. The FSA said: "Lenders will, with immediate effect, be prevented from treating these customers less favourably than other customers." However, these transitional rules do not "compel" a bank to lend to an existing borrower. The FSA states that it ultimately remains a commercial decision for the lender. Was anything new announced in the final rules? Yes - the FSA made a few tweaks. The main change was to state that "high-net-worth" borrowers, business customers and mortgage professionals will have the choice to opt out of receiving advice. It has defined wealthy mortgage customers as those that earn a minimum net annual income of £300,000 or have at least £3m in net assets, which can include their primary residence. Lenders will not have to apply as stringent affordability tests to these customers. Is there anything good about these new rules? Yes - ultimately these rules will result in a more responsible lending market, where borrowers only take on debt that they can afford to repay, leading to a more "sustainable" market. The final rules are also much less prescriptive than what the regulator originally proposed. It removed the need for lenders to look at discretionary spending, and scrapped its proposal to assess affordability over a maximum term of 25 years, even if the actual term of the mortgage is longer. This could have restricted the number of first-time buyers being able to afford a mortgage. If it's already harder to get a mortgage, why do we need more rules? While most lenders have voluntarily introduced better lending practices as a result of the credit crisis and in response to the FSA's original proposals, the regulator said it needed to make sure there are rules in place to deter any return to riskier lending practices.