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Osborne's loan limits anger mortgage experts: Affordability tests already effective, insist critics: Outright caps on lending are 'jumping the gun'

June 13, 2014

Hilary Osborne and Jill Treanor



Property experts say mortgage restrictions could kill off the burgeoning housing market recovery that has started to take hold outside London.

George Osborne's surprise decision to cap the amount of money would-be home owners can borrow, as a multiple of their income or as a proportion of the value of their home, comes as lenders confirmed that first-time buyers are stretching themselves financially against a backdrop of double-digit house price growth in some parts of the country.

But the chancellor's attempt to cool the mortgage market has faced criticism from industry insiders. One leading broker said policymakers should wait until September before taking any decision to use the powers being handed to the Bank of England, so that there was time for new affordability tests to take effect.

The Bank of England's financial policy committee (FPC) - set up to watch for risks to the financial markets - meets next week to assess whether it need take action to cool the housing market. Prices in London are up 18% over the past year, raising concerns about a bubble being created, and the Nationwide building society says house prices across the whole of the UK are at their highest ever level.

Mortgage brokers are already reporting signs of a cooling-off in the market because of the mortgage market review (MMR) process, which forces lenders to scrutinise borrowers' income and outgoings and check if they could still afford repayments if interest rates rose from today's historic lows. The governor of the Bank of England, Mark Carney, is now indicating that interest rate rises could come before the end of the year.

Paul Smith, chief executive of estate agent Haart, said: "MMR hasn't been around long enough for anyone to truly get an idea of its impact on the market, but the chancellor is happy to jump the gun to allow the Bank of England to intervene on the size of mortgage homebuyers can obtain. Common sense dictates that we ought to see how MMR pans out first, and the extent to which it cools the market."

Smith added: "Yes, demand has been accelerating at a far greater rate than supply, but the government is at risk of placing ownership out of reach, as well as holding current homeowners hostage when they find they are unable to meet lending criteria to get a larger mortgage or to be able to move on and up the ladder."

Data from the Council of Mortgage Lenders published yesterday shows that first-time buyers are stretching themselves to get on the housing ladder. Rising house prices and stagnant wages in some parts of the country mean that new entrants to the property market are typically taking on home loans equal to 3.4 times their earnings - as high as the level has ever been.

That figure is the median loan size, meaning half of first-time buyers are saddling themselves with bigger debts. Some lenders are offering loans of up to 5.5 times salary to borrowers who can pass the MMR's affordability tests.

Johnny Morris, head of research at estate agent Hamptons International, said the new powers could prove helpful for homebuyers. "The prospect alone of increased vigilance from the regulator will help to moderate house price growth expectations; this will likely reduce affordability pressures a little and also increase the availability of stock, as sellers realise the potential for future price gains is limited. Long term, used sparingly, the FPC's new powers could well be a significant step towards a more liquid and stable market," Morris said.

The chancellor is handing tools to the FPC to help put the brakes on a market he rejuvenated with a series of measures to make loans more readily available after the 2008 banking crisis. Osborne said the Help to Buy scheme, which helps would-be buyers with deposits of only 5% of the property's value, would also be subjected any move by the FPC to rein in lending.

But David Hollingworth of mortgage brokers London & Country said a blunt cap on income multiples would be a backward step after the more sophisticated tests introduced in April through the MMR.

"All the talk of income caps comes after we have worked so hard to bring in MMR, which puts affordability at the centre of decisions, and got rid of the one-size-fits-all approach," he said.

Hollingworth said some borrowers who had passed affordability checks were able to achieve home loans of up to five-and-a-half times their income, but borrowing of around four times earnings was more normal. He said the call by Vince Cable, the business secretary, to cap loans at 3.5 times salary "would be a retrograde move and would completely lock a lot of people out of the housing market".

Matthew Pointon, property economist at Capital Economics, also cautioned that "strict caps are a very blunt tool". But he said that, apart from reducing the Help to Buy scheme, taking action to stabilise income multiples represented the best way to cool the market because it would have the greatest impact in London.

Captions:

George Osborne, at a Help to Buy development in London yesterday, is proposing a new cap on the amount homebuyers can borrow Photograph: Stefan Rousseau/PA

5.5

Ratio of mortgage loan to income now available for some homebuyers who pass the mortgage market review affordability tests



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Source: Guardian (UK)


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