Lenders want payback - and that's a good thing

When mortgage lenders and brokers came under the regulation of industry watchdog the Financial Services Authority last autumn, it seemed like the exercise might be an expensive waste of time. The extra bureaucracy immediately caused administration costs to go up, and borrowers are already paying the price in higher mortgage application and exit fees.

But now encouraging signs are emerging that borrowers could actually benefit. Lenders are beginning to tighten up on the checks they do before approving applications for more risky loans so they can prove to the FSA that they are lending responsibly.

Northern Rock recently warned mortgage brokers that it will not process applications for interest-only loans if they fail to specify how the borrower intends to repay the loan. Likewise, borrowers aged 50 or over whose loan term extends beyond normal state retirement age may be required to provide documentary evidence of post-retirement income. This will be mandatory for those within five years of retirement.

Northern Rock is not alone. Many other lenders, including the Halifax and Nationwide, are asking for the same information. All say that each case will be judged on its own merits, but Northern Rock and Nationwide stipulate that they will not lend if a borrower has not set up a plan or saving scheme, such as an ISA, pension or endowment, to pay off the loan at the end of the term. (The Halifax is slightly more lenient, saying, for example, that it will consider first-time buyers who are so financially stretched by their climb onto the housing ladder that they can't afford any kind of repayments in the first few years.)

This careful scrutiny is likely to annoy borrowers at first and may, in any case, prove fruitless: after all, there is no way a lender can find out if one of its borrowers terminates a savings plan after opening a mortgage.

But UK citizens now owe £1 trillion and are failing to cope with it - as shown by the highest personal bankruptcy figures ever, published last week. So if these checks serve to remind people that one day they will have to find a way to pay off their loans, that must be a good thing.