News Column

Mortgage lending cap: what does it mean for you?

June 27, 2014

Patrick Collinson, theguardian.com



On Thursday morning the Bank of England governor, Mark Carney, revealed his "macroprudential tools" aimed at cooling Britain's runaway property market. What will it mean in practice?

What is the Bank of England doing?

It is introducing two new rules. Firstly, the amount of mortgages that lenders can hand out on loan-to-income ratios of above 4.5 will be limited to 15% of the total. Secondly, there is a new affordability test, in which borrowers will only be given a mortgage if they can afford the loan at interest rates 3% higher than today.

Is this a major clampdown on lending?

Not really. The main reaction to Carney's announcement is likely to be that he has not gone far enough. Buried in the Bank of England's analysis is its own projection of the impact which suggests that in the worst case scenario, lending would be reduced by just 2.5%. "If house prices and mortgage approvals grow in line with the central scenario, the impact of the policy action is likely to be minimal," it admits.

The impact, such as it is, will be felt in London and parts of the south-east only. Nationally, 9% of new loans are made at 4.5 times income or more, but the figure is 19% in London. Lenders who do a lot of mortgages in these parts of the country may be hit by the 15% limit.

The "new" affordability test, checking that you can afford to pay when rates are 3% higher than today, is already in place at the vast majority of lenders. Some already test borrowers against rather more demanding interest rate targets nearer 7.5%. At best, these new rules will curb some of the worst excesses in the market.

Are house prices now going to start falling?

If this is an attempt to throw sand in the wheels of the housing market, it doesn't seem to be frightening anybody. Take a look at the stock market's reaction. The shares of housebuilders Barratt and Persimmon were two of the fastest risers on the stock market this morning, which suggests that tough talking from Carney might be just that. Talk.

One forecaster, CEBR, has said the rule changes do not affect its central projection that house prices will rise 6.4% in 2014, with 13.8% gains in London. The biggest property website, Rightmove, said the decision "will have no material impact on the market in London, or elsewhere, in the immediate or short-term ... it looks like prices in London and the south-east will continue to rise."

Fundamentally, these new rules do not address the central problem in the housing market, acknowledged recently by Carney, that the UK does not build enough homes.

Will I still be able to get a mortgage?

Yes. The volume of lending will be barely touched by these measures. Small lenders, including most building societies, will be unaffected by these "macro-prudential" moves because Carney has excluded institutions that lend less than 100m a year. If you want a high income multiple loan, it will probably be them you want to head to.

I'm just going through the process of buying for the first time. Will I be hit?

These rules don't come into force until 1 October, so you shouldn't be affected.

I'm thinking of doing a buy to let. What does it mean to me?

Absolutely nothing. Buy-to-let mortgages are outside of the scope of Carney's new rules, so landlords will be completely unaffected. It may even give them more of an edge in the London market. Equity release and "second charge" mortgages are also not in the new rules.

When will interest rates rise?

Carney is coming under attack for yo-yoing on his forward guidance. Will the first rise be the end of this year, or sometime early next year? You can read both into his pronouncements. Either way, the market is expecting the "new normal" to be around 3-3.5%, not the 5-6% common before the financial crisis.


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Source: Guardian Web


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