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Irresponsible lending can have devastating consequences, for individuals living on the margins of affordability and for the wider housing market.

House prices have soared over the last decade and first-time buyers have had to stretch themselves to the limits of what they can afford to obtain a mortgage by borrowing more and more.

In these circumstances, if mortgage repayments or other household costs go up, or income goes down, borrowers can quickly find themselves struggling to meet their financial commitments and falling into arrears, putting their homes at risk.

In recent years, the growing cost of living has placed massive pressure on homeowners' already overstretched budgets and many homeowners have to resort to using risky credit, like payday loans, to meet their monthly mortgage payments. 

This means homeowners are increasingly running the risk of losing their homes in the face of long-term financial uncertainty.

The rise in irresponsible lending

Over the last decade, the mortgage industry diversified and expanded to supply larger and riskier loans. The short-comings of this expansion were highlighted by the spectacular collapse of the sub-prime market - in which mortgages were given to borrowers with bad credit histories at premium interest rates.

In a 2007 review of sub-prime lending practices, the Financial Services Authority (FSA) - the regulatory body for the mortgage industry - highlighted serious concerns about reckless lending in the sub prime market, where some lenders were failing to check if borrowers could afford to repay their loans.

In October 2009, the FSA began a review of how the mortgage market should be regulated in the future. Through the Mortgage Market Review, the FSA is looking at the entire mortgage market to learn from the crisis and explore options for putting things right.

The FSA are currently consulting on regulations for responsible lending and responsible borrowing. The main proposals include:

• making sure that lenders check a borrower’s income before they give them a loan
• introducing affordability tests to ensure that the borrower will be able to meet their mortgage payments
• ensuring arrears charges are based on fair administration costs

Shelter believes the FSA’s proposals close many of the loopholes that have allowed lenders to give out reckless loans, and will prevent lenders from hitting struggling borrowers with unfair charges. We believe these will prevent thousands of people from losing their home.

Shelter's view

The need for more effective regulation

Mortgage lending has only been regulated by the FSA since 2004.

Shelter believes that there is a need for more effective regulation of the mortgage market to prevent such unsustainable lending happening in the first place, and contributing to an affordability crisis.

We support the proposals in FSA’s Mortgage Market Review, which we believe will close many of the loopholes that have allowed lenders to sell unaffordable mortgages that some homeowners had no hope of ever being able to pay back.  The FSA must also continue tough enforcement of its arrears rules.

The need to widen the scope of FSA regulation

Not all lending is regulated. Shelter would like the Government to extend the FSA's regulatory powers to cover lending practices that currently fall outside its remit, in particular:

• Second-charge lending
• Buy-to-let lending

We believe these lending practices can pose great risks for households and should be brought within the FSA’s regulation regime.