Toughened mortgage rules outlined

Toughened mortgage lending rules to make sure borrowers can only take out deals they can afford and prevent any return to irresponsible lending have been outlined by the financial services regulator.

The shake-up, which comes into force in April 2014, is the result of a long-running review by the Financial Services Authority (FSA), aiming to put "common-sense" at the heart of the market.

The FSA also announced a new rule stating that lenders must not take advantage of a borrower who cannot get a mortgage elsewhere by treating them less favourably than other similar customers, for example by offering them a worse interest rate or terms.

It said this would help protect people who were already stuck with their current lenders, as well as those who may become trapped when the new rules came in.

From 2014, lenders will need to consider a borrower's income and outgoings and interest-only mortgages will only be offered to people with a firm repayment plan, rather than relying on hopes that house prices will rise.

They will also have to factor in the impact that future interest rate increases could have on repayment costs.

The new rules will affect the nine million UK households which have a mortgage as well as many people in the rental sector who are already struggling to buy a home.

The FSA insisted its rules would not stop lenders being able to offer low-deposit mortgages to first-time buyers and there would be no upper age limits imposed.

Which? chief executive Peter Vicary-Smith said it was "disgraceful" that so many people were encouraged to borrow more than they could afford.

He said: "The banks have a responsibility to help these people who are now struggling through no fault of their own."