News Column

RBS clamps down on large mortgages: Salary limit to be placed on loans over pounds 500,000 Nationwide says prices have broken 2007 record

June 4, 2014

Hilary Osborne

Royal Bank of Scotland has become the second big lender to clamp down on large mortgages, announcing it will restrict lending on loans above pounds 500,000 as concern grows that the London property market is entering bubble territory.

The move came as figures from Nationwide building society showed UK house prices hit a new peak in May - breaking the previous high reached before the financial crisis - to hit an average of pounds 186,512.

The announcement by state-backed RBS, which accounts for one in 10 of all UK mortgages, follows a similar decision by the industry leader, Lloyds Banking Group, which is also part-owned by the taxpayer. Like Lloyds, RBS will limit mortgages under its RBS and NatWest brands to four times the applicant's income if more than pounds 500,000 is being borrowed. It will also restrict these loans to a maximum 30-year term, in order to prevent borrowers taking out larger mortgages by spreading out repayments over a longer period.

A spokesperson for RBS said: "We are focused on looking after the interests of our customers and ensuring that they only take on mortgage lending that they can afford."

The move is likely to increase pressure on other lenders to follow suit so they do not become overexposed to the London property market, where prices have increased by 17% during the past year. According to the Office for National Statistics, the average house price in the capital is pounds 459,000.

Andrew Montlake, director at Coreco Mortgage Brokers, said: "There seems to be no coincidence that the two partly state owned banks are the first ones to act in this manner."

The change was likely to have little impact as most people taking mortgages of that size did not require large income multiples, he said. "What it does do, however, is underline a change in sentiment that house price rises will not be allowed to increase for ever, which in turn puts more doubts in the mind of buyers when faced with higher prices and makes the Bank of England's next move that little bit easier."

Yesterday, Nationwide reported a 13th consecutive month of price rises and said annual price inflation had risen to 11.1%. In cash terms, the average UK house price is now pounds 468 higher than in October 2007, when the housing market peaked.

The latest figures come a day after the European commission warned of "distortions" in the UK housing market and urged the government to build more houses. Vince Cable, the business secretary, held a summit yesterday with house-builders, lenders and housing associations.

The Nationwide data stoked the debate about whether the market has reached unsustainable levels, particularly in London. In real terms, prices are still around 20% off their previous peak once inflation since 2007 is taken into account.

"We wouldn't take too much comfort from that," said Matthew Pointon, property economist at Capital Economics. "It is widely accepted that house prices had risen far above any measure of fundamental value during the previous boom. And with earnings growth very subdued over the past five years, the house-price-to-earnings ratio is only around 10% below its previous peak."

Nationwide's latest snapshot of the market, which is based on home loans it approved during the month, showed an easing off of the monthly rate of inflation to 0.7% from 1.2% in April. Its three-month growth figure also fell, from 2.5% in April to 2.3% in May. That brought it to the lowest level since August 2013.

Recent lending data has suggested that the introduction of tough new mortgage rules in April under the mortgage market review (MMR) has reduced activity, with the latest Bank of England figures showing a 17% fall in approvals for house purchases since the start of the year.

Nationwide's chief economist, Robert Gardner, said it was too early to say if these "tentative signs that activity in the housing market may be starting to moderate" were indicative of a cooling market.

"The underlying pace of activity should become more evident as we move through the summer months and the impact of MMR becomes clearer," he said. "However, with mortgage rates close to all-time lows and labour market conditions continuing to improve, underlying demand for homes is likely to remain strong."


New-build homes in a development in south London. The average UK house price has risen for 13 months to a high of pounds 186,512 Photograph: Andrew Winning/Reuters

For more stories on investments and markets, please see HispanicBusiness' Finance Channel

Source: Guardian (UK)

Story Tools Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters