The FSA are to announce that lenders must take greater measures to evaluate the spending patterns of customers before providing them with a mortgage. Is this a good or bad thing?
It is clear that in some cases people who take out mortgages will “over spend” their budgets, and there is an argument that such people should be “protected” from taking on a mortgage that they will most probably be unable to pay at a later date.
There is also an argument that this is a step to far, it intrudes into personal lives, surely how we choose to spend our money is private. Also whilst current spending habits maybe be considered acceptable to banks, these can change, for example a change in family circumstances by financing a son / daughter through university, getting married, getting divorced, etc.
Maybe we are once again seeing centralised over-regulation as a panic reaction. We are already increasing regulation for banks to lend more responsibly, do we need to extend this into the personal lives of everyone who wants to borrow?
What about alternatives, it seems to me that regulation of credit card facilities could be far more effective. Maybe there could be a cap on total amount (relating to income) that an individual can have outstanding on their credit card? The cost of a small credit card loan can soon become as expensive as a mortgage on a property. For example:
- Credit card debt of £20,000, interest rate of 25%, gives net cost per annum of £5,000
- A mortgage of £100,000, interest rate of 4%, gives a net cost per annum of £4,000
This is a simplistic example but it clearly illustrates that credit card debt is far more costly to consumers and with the ease with which lenders provide these facilities then it is always going to expose the more financially vulnerable to risks at some later date.
In conclusion, maybe there should be a greater focus on the unsecured lending market where it seems all too easy to obtain credit at very high interest rates, such credit can seriously impact those who are less able to manage their spending.
