Lending rules set to be relaxed to free ‘mortgage prisoners’

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Expectations that lending rules will be relaxed to help homeowners trapped by negative equity to move house, allowing them to take it with them, have been given a cautious welcome.

The Financial Services Authority (FSA) is thought to be considering measures to loosen lending restrictions which could help free “mortgage prisoners”.

According to figures from the Council of Mortgage Lenders, one in 12 homeowners – around 827,000 – are in negative equity, where the value of their home is less than the amount of mortgage they owe. The new guidance would permit homeowners in negative equity to remortgage to buy another property without having to immediately pay off the balance owed.

The easing of restrictions would only be for customers who have not had problems repaying their mortgage, and those who have struggled could face tougher tests. Paul Broadhead, head of mortgage policy at the Building Societies Association, said he was hopeful the FSA would consider various borrower circumstances when giving its views.

He added: “We have been lobbying for there to be no hard regulatory limits on loan-to-value ratios as these could cause issues for a variety of borrowers – not just those in negative equity.”

The FSA’s expected announcement next week follows a two-year inquiry and will reveal plans to stop the excessive lending that led to the banking crisis.

The problem has also had a knock-on effect on first-time buyers, who are squeezed out of new homes as those they would normally have bought are being lived in by people who cannot move.

Peter Bolton King, chief executive of the National Association of Estate Agents (NAEA), said: “Banks must be given clearer incentives to offer mortgage finance to the UK’s embattled first-time buyers.”