Earlier today, the Financial Services Authority (FSA) announced plans for a new set of mortgage lending rules to prevent “a return of the risky mortgage lending seen in boom times”.

The new set of rules should prevent homeowners from borrowing more than they can afford and are likely to come in full effect by 2013.

FSA’s latest mortgage market review paper (pdf, 2.4 MB) outlines the need for all prospective borrowers to get the right information and advice. It also aims to ensure that mortgage lenders will be assessing the affordability of loans more effectively and be thoroughly checking each applicant’s ability to keep up with their mortgage repayments.

Existing borrowers who might have been prevented from remortgaging will also be allowed some degree of flexibility to manage their lending terms under the new mortgage lending rules.

According to the three key proposals of “good mortgage underwriting”, as explained by FSA, borrowers should avoid assumptions on future house prices and lenders should assess long-term affordability. The three key proposals specifically state that:

• Mortgages and loans should only be advanced when the borrower can afford repayments without relying on future house price rises.

• Every affordability assessment should take into account any future changes in interest rates with a minimum five-year outlook and borrowers should not enter contracts based on the assumption that the initial interest rates will not change later on.

• Interest-only mortgages should be assessed no differently than repayment mortgages unless the borrower has a viable option to pay off the loan that does not rely on the assumption that house prices will rise.

Chairman of the FSA, Lord Turner commented on the proposed rules:

“We believe that these are common sense proposals which serve the interests of both lenders and borrowers. While the excesses of the pre-crisis period have largely disappeared from the current market, it is important to ensure that better practice endures in future when memories of the crisis recede and the dangers of poor practice return.”

“The three key proposals are, we believe, the most effective way to tackle the problem of risky lending. But it is essential that we understand what their impact would be – how many consumers would be protected from the distress of arrears and repossessions, and, how many consumers who could have afforded a mortgage might have to take out a smaller mortgage or to delay their purchase.”

“The estimates are inherently uncertain, but they suggest that the new rules would have only a marginal effect in current market conditions – and particularly so for first time buyers – but would act as a significant constraint if market practice were in danger of returning to the 2005 to 2007 pattern. That pattern of effect would be a highly desirable one. We are however particularly keen that lenders provide their detailed assessment of the likely impact of these proposed rules. Then the FSA will be able to make appropriate final decisions.”

“The proposals published today reflect the ideas and input of many stakeholders, including consumer groups and lenders. We believe these proposals will hardwire common sense standards into mortgage lending and guard against the risky lending practices of the past – leaving most borrowers unaffected, but better protected.”

The FSA Board will make a decision on the final form of the new mortgage lending rules in summer 2012.

This year’s Christmas period will see almost one in three Britons slip into some form of debt to fund their holiday spending, according to an online survey on Christmas spending by YouGov. (pdf, 815 KB)

The online survey was conducted on behalf of Halifax and yielded some very interesting, if not alarming, results. According to the survey, the average person in the UK plans to spend nearly £38 on gifts for each loved one, with women planning to buy gifts for 10 people whereas men will give gifts to seven people on average.

Despite the financial crisis it seems that only 31% of the people surveyed have cut back on Christmas spending compared to previous years while 32% have increased their spending, with many of them going into debt to fuel their holiday purchases.

YouGov’s latest survey also found that more than 52% of the consumers do not save any money for their Christmas spending, while only 14% of the people surveyed said that they save money throughout the year to fund their Christmas spending.

Arguably the most alarming fact is that 31%, almost one in three, will go into debt to fund their Christmas spending, with 10% using their credit card to buy presents and planning to pay the money back later.

This year in particular more people than ever consider taking out a payday loan and 20% of all UK adults who plan to buy Christmas presents believe they will need to directly borrow money to pay for some of their purchases.

Rob Wood, Head of Halifax Savings, commented on the survey’s results: “It seems Christmas spending has not slowed down as we head into the holiday period and only a small number of people have felt the need to save throughout the year to cover the costs. It is encouraging, however, that most consumers will have the money [upfront] to cover the costs of Christmas presents. Christmas can be a tough time financially for families and advanced planning and saving is the best way to ensure there is enough money to go around for all the extra costs.”

Loan expert Tim Moss at MoneySupermarket.com also commented: “This year has been incredibly tough for consumers with the rising cost of living really hitting the nation’s wallets hard. It comes as no shock that such a high number of people will be tipped into debt this festive season, particularly as Christmas is a time when people generally increase their spending. With many people also being paid early in December, January payday may seem a long way off, so planning ahead is vital to avoid carrying over the debt burden into next year.”

Addressing the less financially secure people, Tim Moss added: “For the large number of people who are unable to save, there are a number of ways they can reduce the Christmas spending hangover by the New Year, and it is essential to use the right product to meet their needs. For example, a credit card offering zero per cent interest on purchases might be the sensible option if they are able to pay off the balance in full within the zero per cent period. Dipping into the unauthorised overdraft may prove costly for those unable to pay this off, particularly as the charges for dipping in the red may not hit until January.”

Payday loans are small, unsecured loans with sky-high interest rates, aimed at people who struggle to make ends meet each month until their payday.

Payday loans usually range from £300 to £1000 and since they are supposed to be short-term their interest rates can soar up to 30% or more for some providers. This translates into sky-high annual percentage rates (APR) of 3,000%, 4,000% or more!

3.5 million Britons are considering taking out a payday loan within the next six months, according to a recent research by insolvency trade body R3.

R3, also known as the Association of Business Recovery Professionals, “promotes best practice for professionals working with financially troubled individuals and businesses”. R3’s insolvency practitioners have been raising concern about payday loans and a new kind of “zombie” debtors who only pay the interest charges on their debt and not the debt itself.

R3 president Frances Coulson commented on the issue of payday loans voicing his concerns:
“Payday loans are not the best way to resolve debt struggles. We know that many who take them out find them to be a negative experience, often escalating financial troubles.”

“We hear talk of ‘zombie’ businesses, but seeing individuals run their finances in the same way is troubling. ‘Hanging on’ each month simply cannot be maintained forever. This group will have very few options should interest rates rise or their circumstances change.”

“Having a financial buffer is crucial to weathering periods of difficulty. If struggling to payday becomes a regular occurrence, seeking financial advice should be a priority over short term high interest credit. ”

Of the 2,000 people interviewed by R3, 45% struggle to make their money last until their payday while 60% of those who had taken a payday loan have already regretted the decision. Moreover, 48% claim the payday loan had negative impact on their financial situation and only 13% believe their payday loan impacted positively on their finances.

Forbes analysts explain that the mortgage crisis of 2007 had forced Northern Rock to turn to the Bank of England for liquidity support to meet short term debt obligations and unable to an acceptable offer from the private sector, Northern Rock was eventually nationalized on February 17, 2008.

Now, the British Government is selling Northern Rock plc to Sir Richard Branson’s Virgin Money for £747m. Completion of the transaction is expected on 1 January 2012.

The official announcement states that “The sale is in the best interests of the taxpayer, secures the long-term future of the company and will increase competition in the banking sector. This is part of the Government’s wider strategy for the banking sector with safer ring-fenced banks and more competition for customers.”

As part of the sales agreement Virgin Money has committed to:
• No further compulsory redundancies, beyond those already announced, for at least three years from the completion of the transaction.
• Retaining and expanding the total number of branches currently operated by Northern Rock.
• Extending support for the Northern Rock charitable foundation for a further year.
• Making Newcastle the operational headquarters for the combined business.

According to the press release from Virgin Money the transaction will create a significant new competitor in UK retail banking and, in doing so, it will help increase diversity in the retail banking sector as Virgin Money seeks to innovate and expand into new market segments.

Virgin Money stated that the transaction has the potential to eventually raise more than £1bn for the taxpayer in the long term along with numerous other benefits including the return of public sector stakes in banks to the private sector.

Sir Richard Branson, Founder of the Virgin Group said: “Banking in the UK needs some fresh ideas and an injection of new competition. I’m delighted we will get the chance to work with the loyal staff of Northern Rock to create a new force in the market. Virgin has a history of entering new sectors to improve service and provide value for customers. We plan to do the same in banking”.

While many analysts have commented positively on these developments others are skeptical and some have warned that Virgin Money products must become more competitive in order to revitalize the stagnant banking market.

Adrian Coles, director general of the Building Societies Association, said that Northern Rock’s sale was a “bittersweet moment” with both positive and negative effects on the market.

Earlier this month, the Bank of England’s Monetary Policy Committee voted to give the economy an additional cash injection of 75 billion pounds.

This was the second round of quantitative easing (QE) as the bank had already injected 200 billion pounds back in 2009 in an effort to increase commercial bank lending.

While answering questions on the current status of economy to a parliamentary committee, Bank of England governor Mervyn King commented on the decision to increase QE and the impact that might have on bank lending:

“I can’t guarantee that it means that bank lending will rise, but what I do believe is that it won’t fall as far as it might otherwise have done and it may start to rise now we’ll see. But I think the action will make a difference to the amount of lending, but it certainly doesn’t guarantee that lending to the real economy is positive.”

Mr. King acknowledged that Britain’s economy has been problematic and mostly stagnant for the past year and warned that it could start deteriorating again as he commented on inflation and the causes of the “very large squeeze on household income”:

“Now that’s not the result of inflation being high, inflation is the symptom. The causes of that squeeze on living standards are real causes, they are a change in real prices of energy, and utility prices of gas, electricity at home, they are the consequences of higher Value Added Tax, higher food prices, and consequence of a fall in the real exchange rate which was necessary to enable us to be able to rebalance our economy in a way that was… after quite a long period, and of relatively overvalued exchange rate.'’

Finally, when asked why the Bank of England did not increase the QE plan earlier, possibly stimulating commercial bank
lending, the governor replied that the deterioration of the Eurozone and world economy could not have been predicted earlier.

“I don’t think the scale and the immediacy of how the problem deteriorated in the euro area was obvious at the beginning of the summer”, he replied.

The bank of England approved 52,410 new mortgage loans in August, marking the highest number of mortgage approvals since December 2009.

The director-general of the Building Societies Association, Adrian Coles commented: “Approval figures continue to look promising as consumers take advantage of the competitive mortgage rates.” But he also forewarned: “However, the outlook for the economy has deteriorated over the past month as has consumer confidence, which could well spill into the housing market, causing further weakness”

The number of new mortgages approved for home buyers in August was nearly 3,000 more than in July and over than 5,000 more than the previous six-month average.

Meanwhile, the Nationwide reports that: “UK house prices changed little in September” rising by 0.1% in the month but still being 0.3% lower than one year ago.

As new mortgage approvals are expected to continue in the coming months experts believe that sales funded by mortgage loans will see an increase during autumn and this could be reflected in the coming updates to the House Price Indexes across the country.

However, according to the Bank of England’s latest credit conditions curvey (2001/Q3) a lending squeeze to households and small businesses might be imminent due to the eurozone crisis.

According to the Bank’s Q3 survey, lenders “pointed to adverse wholesale funding conditions as a key factor which might constrain future lending.” And recent discussions with some of the major lenders suggested that “although these factors had not yet led to reduced credit availability, a period of sustained tight funding conditions could act to constrain their ability to extend loans going forward.”

Between the rising number of mortgage approvals and the adverse wholesale funding conditions reported by the Bank of England there might be a relatively small window of opportunity before 2012 for households and small businesses to take advantage of an optimal mortgage loan.

Millions of people in overdraft will see their overdraft charges cut. The Halifax, with more than 5 million customers with current accounts, ha instead introduced a daily penalty of £5 if you go into the red. The bank previously charged £35 for a refused payment due to insufficient funds, £35 for authorised transactions whilst in the red, and £28 for using an unauthorised overdraft.

This all amounts to a month is £155 rather than £238 A DAY under Halifax’s previous charging arrangements.

The NatWest has announced that it was cutting the charges for a bounced cheque from £38 to just £5.

This all seems to have resulted from pressure from the Financial Services Authority although letters we have seen from banks imply that it is simply as a result of a “long-term review”.

No matter what the truth, it is a fact that banks need to be more transparent in their charging and customers need to be given a fairer deal.

Some borrowers are finding it impossible to gain access to the best mortgage deals, loans and credit cards despite having paid all their bills on time. Why? Because the credit reference agencies have made errors on the credit file they hold on that person.

Nobody gets everything right one hundred per cent of the time and this applies to the credit agencies as well. They make mistakes – but you pay dear for their mistakes!

Confusing you with someone else, recording other peoples’ credit problems on your file and general inaccuracies can wreck your credit rating and cause you untold headaches.

Our advice is check your files held by the three main credit reference agencies – Equifax, Experian and Callcredit. You are entitled to receive a copy of your file for an administration fee of £2 - and go through it with a fine tooth comb. If anything is wrongly recorded, the agencies have procedures you can follow to have your file corrected. The problem is that it all takes time and is a pain in the neck!

But until your record is corrected credit will either cost you more or even be refused. So once you have your record spot on, it’s a good idea to make the same check every year.

The FSA wants to reform the way mortgage lenders agree new mortgages. It’s proposals include a ban on self-certification mortgages and more detailed verification of the borrowers income.

The FSA’s 7 points are as follows:
1. A ban on self-certification mortgages which some have labelled “liar loans”.
2. Borrowers to provide far more detils about their income.
3. Abolish fast-track applications where mortgages are approved without detailed checks.
4. More stringent affordability checks to ensure borrowers can cope if interest rates rise.
5. Buy-to-let mortgages to be regulated.
6. All second charged loans to be regulated
7. All non-bank mortgage lenders to be subject to new and more rigorous, capital requirements.

Jon Pain, the FSA’s Managing Director is reported as saying, “We have to, learn from the lessons of the past. Affordability tests are important as we want to be sure that a borrowers net income is enough to cover the prepayments.”

Next Wednesday, judges at the Supreme Court will rule on the legal battle about unfair bank charges.

This is the case between the Office of Fair Trading and the main high street banks and will decide whether the OFT can assess the fairness of overdraft charges – which have been as much as £39 a time for exceeding your account limit. The Court of Appeal has already ruled that charges can be assessed but the banks appealed to the Supreme Court which is the highest court in the land.

It is estimated that 1.1 million people have £1.7 billion worth of charges awaiting this decision because a freeze was placed on complaints back in July 2007 when the banks appealed against the Court of Appeal’s decision in favour of the OFT.

Banking experts believe that the banks could face a £20 billion payout if they were forced to repay all the charges under dispute.

A third of fresher students at University are still waiting fort their student loans and grants to help pay their rent and food after the student loans system collapsed in administrative meltdown.

Students are reporting that the Student Loans Company has lost forms and seems unable to answer queries – and even answer the phone! This has meant that the Universities have had to step in and financially assist in the worst cases.

Apparently, a document scanning system at the loans Company failed losing documentation and forcing staff to go back to manual processing. But in practice the debacle looks more complicated than that with as many as 175,000 students waiting for their money.

This is not the first year that the Student Loans Company has got into a mess. They know the likely workload well in advance, so why, oh why, can’t they organise themselves better?

Students choosing a student bank account don’t need to worry that they’ll be saddled with the same bank after graduating. After graduating, students can open an account with any of the banks that offer “graduate accounts” and simply transfer their debt from their student account.

What’s more on transfer, some banks offer an interest free period. Take the Halifax for example. They will offer an interest free overdraft for up to £3,000 for the first 12 months – beyond that period, the rate is currently 19.8%. If the prospect of 19.8% puts you off, consider the Co-operative bank. Their graduate account offers a £2,000 interest free overdraft for 12 months followed by interest at 9.9%.

If you want an interest free period of more than 12 months, consider Lloyds TSB and the Royal Bank of Scotland. They offer interest free facilities of £2,000 in the first year followed by £1,500 in year 2 and £1,000 in year 3.

The cost of mortgages is on the up despite bank’s costs falling to record lows. The cost of three and five year fixed mortgages has risen again despite bank’s paying less to obtain the funds they lend.

It means that for a £100,000 mortgage, the banks are making £515 more annual profit than they were just nine months ago in January. Figures show that the average price of a three year fixed rate mortgage increased from 4.67% in July to 4.81% at the end of August. For five year deals the price increased from 6.68% to 5.72%.

At the same time, the three year interest rates paid by the banks on the wholesale money markets was 3.3% and five year rates were 2.6 %.

But the biggest cash cow for banks are tracker mortgages. Banks are borrowing funds for these products at 0.7% and lending it out on tracker mortgages at 3.84%.

In our view these represent market forces where the demand for mortgages simply exceeds the volume of funds which banks, post credit crunch, are prepared to supply. Until demand and supply come more into balance, we are likely to see the banks making hay whilst the sun shines and taking the opportunity to boost their profits and balance sheets.

Interest rates on personal loans are continuing to rise as lenders remain worried about borrowers keeping up with their repayments.

The rates from Marks & Spencer, Egg, and Tesco have all recently risen by 1.2%, 1% and 0.2% respectively. Twelve months ago, the typical interest on a three year loan for £5,000 loan was 11.2% whereas today it is 12.2%.

Rates have risen because lenders think that the outlook for defaults continues to worsen. As a result the anticipated losses have to be covered by the majority of customers who do fulfil their obligations. This tends to indicate that the banks are supporting those economists who foresee a worsening unemployment rate. Now that the government is clearly planning savage cuts in expenditure the fuller, longer term affect of the credit crunch it is coming home.

We have to advise that despite the recent signs of recovery, the best advice remains batten down the hatches.

Universities are have to arrange emergency funds for thousands of students whose loans have failed to arrive in time for the new academic year The Universities are stepping in to provide money for living costs and to delay payments for accommodation as the backlog in despatching loan grants continues. Without this action the students affected would be unable to afford food and rent.

A spokesperson from Universities UK said that all universities had put arrangements in place to support students who faced financial difficulties which were not of their making.

It is the Student Loans Company that seems to have messed things up yet again. How many years does this cock up need to be repeated before the Student Loans Company learns the message that there is a huge influx of work in September each year?

But the Loans Company blames students for delaying their applications and say that if they got them in on time, this problem would not exist. However, they are finding it difficult to explain why students are having great difficulty getting their phone calls answered. “We’re sorry if some of our customers are having difficulties getting through”, they said.

This years, 1 million students have applied for loans and about 830,000 grants have been paid out leaving 170,000 high and dry!

Top economists say that UK interest rates could remain low for years. Their forecasts come as the Bank of England hinted that if necessary, it would continue to pump money into the economy, thereby depressing interest rates.

Only a month or two back economists were forecasting that base rates would begin to rise from their all time low of 0.5% but now their expectations of a rise are being pushed back. There have even been forecasts that the 0.5% rate could last for years!

But other economists warn that things could change markedly after the election next year. They say that as government spending will have to be cut to close the budget gap, interest rates could have to rise.

All very confusing isn’t it?

The average cost of overdrafts stands at an all time high – 18.9% which is the highest since the bank of England’s records began in 1995. It would seem that the bailed out banks like the Royal Bank of Scotland, are responsible for the highest charges.

The cost of personal loans is lower with an average rate of 13.1% and this is the highest since 2004.

This is further confirmation, as if any were really necessary, that customers are not seeing any benefit of the historically low Bank Rate which is standing at 0.5%. It is clear that whilst the banks are restricting the amount they lend, they are boosting their profits and balance sheets by pushing up charges on all their financial products.

This combination of record levels of interest and restricted supply of credit is set to choke economic activity in the UK and negate the affect of the £1.4 trillion of public money that the public injected into the UK banking system. And figures out this week show that recovery in the UK is lagging the USA and mainland Europe. The reason given for this is that financial services were a large proportion of the UK’s output and it is that sector that has been most badly affected by the recession.

This all suggests that if the UK’s recovery is to get going, the Government will have to tackle the availability of credit.

Lloyds TSB clients face charges of up to £200 a month if their current account goes into an unauthorised overdraft but if users of the banks’ Islamic account goes overdrawn, only £15 is charged. This has led the bank open to accusations of religious discrimination.

The Islamic account attracts Muslim clients to the bank by allowing them to bank in accordance with their faith. Sharia law does not allow interest to be paid so these accounts do not have a overdraft facility. So if a payment is made and the account has insufficient funds, the payment is blocked and a “returned payment charge” is levied. But on some accounts there is an arrangement whereby such payments are authorised and a £15 “unplanned overdraft fee” is charged. The bank says that the £15 payment is a fee, not interest and as such is in accordance with Sharia law.

However, standard current account users who go unauthorised into the red by over £100 are hit with fees of £20 per day for up to tens. This means charges of up to £200!

One commentator said, “It strikes me that this is bordering on the illegal. One cannot help thinking that the bank is bending over backwards to assist Muslims to the detriment of everyone else”.

What do you think?

The Institute for Public Policy Research, the Labour Party’s think tank, has recommended that middle class students should be denied student loans to fund the cost of living whilst at University and tuition fees.

If this were to happen, their parents would be forced to shoulder more of the cost – £3,225 for tuition alone possibly rising to £7,000 if Universities succeed in their lobbying for higher fees plus living expenses. Denying middle class student the opportunity of part funding their University education through a student loan would place untold pressures on the middle classes.

These proposals from the Institute for Public Policy Research are in effect a massive stealth tax on families whose aim is to ensure their children are fully educated for the 21st century. The Governments reaction has been luke warm to the report but they have refused to dismiss its conclusions saying that the Government is committed to making sure that money is not a barrier to people going to University whatever their background.” Few could argue with that sentiment but as usual, the devil will be in the detail – when and if it appears!

The bloodbath in the loans market has meant that many of the small and medium sized loans companies that once sold loans have gone bust or dissolved, particularly those that sold to people with impaired credit.

The result is that many clients who make a claim because they believe they were mis-sold payment protection insurance cannot reclaim against the business that sold the loan to them, because it no longer exists. Instead they are appealing for refunds from the Financial Services Compensation Scheme.

Take Picture – they were a specialist lender whose PPI premiums for a five year loan often amounted to 50% of the initial loan value. The problem is that Picture went into liquidation last year so any customer that makes a claim is re-directed to the Financial Services Compensation Scheme. And under that process, compensation can easily take 12 months to come through.

There are suspicions that some of the lenders have dissolved themselves to avoid the mis-selling liabilities that stood on their books. In our view, if that can be proved, then lawyers should find ways to hold the Directors personally responsible for the company’s mis-deeds.