U.K. Mortgage Rules Meant to Halt Another Crash Take Effect

Rules that require borrowers to prove they can afford to make mortgage payments even if interest rates rise take effect today in the U.K. as regulators try to prevent a repeat of the 2008 real estate crisis.

The Mortgage Market Review rules will restrict interest-only and self-certified mortgages and stop banks from relying on rising property prices to balance the risk that a borrower might not repay their loan. The measures, finalized in October 2012, take effect today.

“We do not want to see mortgage lending return to the practices of the past where people were taking out mortgages they simply couldn’t afford,” Financial Conduct Authority Chief Executive Officer Martin Wheatley said in a statement. Borrowers “should feel confident that practices which led to hardship and anxiety for consumers in the past will not be repeated.”

With U.K. home prices rising at the fastest pace since 2010, banks are making more high loan-to-value mortgages. The number of loan products available to borrowers with a 5 percent deposit has tripled to 132 since the government in October extended its Help-to-Buy program, which assists buyers with down payments on new homes, according to Genworth Financial Inc.

The new regulations require lenders to assess the impact of rising interest rates in mortgage-approval calculations and ban interest-only mortgages in cases where the borrower would have to rely on rising house prices to repay the loan. The rules are meant to rein in the type of practices that led to the U.S. subprime crisis, which triggered a global financial meltdown.

Bank of England

The Bank of England may be able to make the mortgage tests even more stringent by applying higher hypothetical borrowing costs.

“You could see a spike in interest rates higher than is currently embedded in the market in the U.K., and we’d want to make sure that, as banks and building societies lend -- and very importantly, as households borrow -- they can withstand those shocks,” BOE Governor Mark Carney told reporters when the measure was announced in November.