Is this government about to go mad ?

The Government has announced that it to conduct a review of mortgage lending that may stop people from borrowing more than three times their incomes.

It plans to assess the arguments for and against limiting lenders to low income multiples. It will report its findings in September.

Traditional income multiples were three times single income or two and a half times joint income, for many years. However, in recent years,the method of determining how much a lender will lend has been overtaken by the use of affordability criteria (where the lender looks at outgoings and family profiles, as well as income).

I think the basing lending decisions on affordability is a good way to lend. In my opinion, restricting lending to three times a borrower's income would be a step backwards, not forwards.
Here's why:

Existing borrowers

First of all, we don't know how the proposals will affect existing borrowers who have borrowed more than three times their income. If the new rules are enforced across the market, then many borrowers will be left with nowhere to re-mortgage at the end of their current (fixed, capped, discount, or tracker) deal. They could be forced to accept whatever deal rate their existing lender offers them at the time.

Why is the Government proposing this?

Mortgage arrears have risen by 31% in the past year and the Government wants banks to go back to prudent and responsible lending. Some argue that by restricting income multiples, future arrears may be avoided and borrowers may not become overstretched.

In reply, the Council of Mortgage Lenders has pointed out that the majority of arrears result from unemployment rather than the customer having over-borrowed.

However, it is clear that many people are in favour of tighter criteria, saying 'this should have been done years ago' and citing 'responsible lending'.

But house prices have risen much faster than incomes over the past decade - even taking into account the recent falls in prices. Today's first time buyers face a real struggle to get themselves on the housing ladder, even those who have not overstretched themselves and are looking to buy a modest starter home.

Of course most lenders have been much too generous with their lending decisions over the last 10 years, forgetting about the need for deposits and lending to first-time buyers without deposits, as property prices spiralled upwards.

Few people think that lenders should not have been more restrictive about who they lend to. But where has the FSA and Government been for the last 18 months? The mortgage market is far more restrictive than it's been for years and it is currently not that easy for anyone, let alone a first-time buyer, to get a mortgage.

First, you need a ultra-clear credit record and in employment, as there are only a few sub-prime and self-cert mortgages products that are now available (and at not very competitive interest rates). Then a deposit of 25% or more, and the income multiples currently being offered are not that excessive. According to the Council of Mortgage Lenders, the average income multiple for first-time buyers was only 3 times income last month, down from 3.33 a year ago and the lowest level since 2005.

Additionally, using income multiples to determine how much to lend to someone is a crude method that mortgage lenders have been moving away from.

Here's why:
Compare a childless couple earning £40,000 and a single mum earning £40,000 but with three children. Clearly the single mum has far greater expenses looking after her kids, whilst the childless couple could afford to pay more of their income towards their mortgage payments.

The same points can be said of someone who chooses a higher cost lifestyle compared to a more frugal borrower. If one person has no credit card and loan debt and another has thousands in unsecured borrowing, is it really fair that they are restricted in the same way? Of course not. The mortgage market switched to working out maximum borrowing based on true affordability years ago. This means that as well as looking at a borrowers income, lenders will also take into account your expenses -- such as dependants, , financial commitments, and other expenses.

Moving backwards by 10 years to calculate borrowing levels on income alone has been described as a retrograde step.

Price crash effect

A catastrophic effect of the potential new measures would be to reduce further property purchases and send prices further down. The housing market is badly damaged, many jobs depend on it and driving down prices further and faster with this measure will not help the UK economy in my view. It's already hard enough for people to buy and making it harder could cause further harm. Buyers will simply not be able to get mortgages large enough to buy a property, so sellers will have to drop prices, not just a bit more, but massively in order to achieve a sale.

The average first-time buyer earns around £26,000. Under the new proposals, if they came into force, they would not be able to get a mortgage of more than £78,000. The average UK house price is £160,000 !! This huge gap, and crude nature of the income multiple method, means I, and most other mortgage advisers, are keeping our fingers firmly crossed that this Government sees sense by September - and looks for another, more effective way to ensure responsible lending.

At least there's a general election in the next 12 months !

Stamp Duty announcement - worth the wait?

The government has announced that the stamp duty threshold has been increased from £125,000 to £175,000 for a period of one year. The move - which applies to residential property - would save someone buying a £174,000 property £1,740.

After weeks of waiting while the housing market has ground to a virtual standstill, it would appear that the announcement wasn't actually worth waiting for as it falls well short of what the market had hoped for. However on the plus side now that the announcement has been made it may mean the market starts moving again.

Other measures aimed at boosting the market include "free" loans of up to 30% for first time buyers in England.

Households earning less than £60,000 will be offered loans free of charge for five years on new properties, co-funded by the state and developers.

The stamp duty move was welcomed by Britain's biggest mortgage lender, Halifax.

A spokeswoman said: "This is a sensible measure and it will help the housing market."

House prices are reportedly falling at their fastest rate since the early 1990s, while rising fuel costs and the global credit crunch are denting economic confidence.

Communities Secretary Hazel Blears will announce a raft of proposals on Tuesday aimed at buoying the property market. She is one of several cabinet ministers putting forward plans seen as the beginning of Mr Brown's "recovery plan".

The loans system, called HomeBuy Direct, is to be run together with "large-scale" property firms.

Once the five-year "free" period is up, homebuyers will be asked to pay a fee, the Department for Communities and Local Government said - although no more detail of this was provided.

A spokesman added that "hundreds of millions of pounds" had been put aside in the last Budget for such a move.

In a statement, the DCLG said: "Not only will this [HomeBuy Direct] help first-time buyers, but it will also support the industry by identifying buyers for their new homes.

"This will help the housebuilding industry weather difficult conditions, so that, when the market recovers, they are ready to expand and get back on with building the new homes the country needs for the long term."

'More homes sooner'

For existing homeowners who can no longer afford mortgage payments, the government says councils or social housing landlords can pay off the debt and instead charge tenants rent "at a level they can afford".

The DCLG is also promising to "bring forward funding for social housing from existing budgets, delivering more social homes sooner".

However, an opposing view was heard on the radio this morning a very well spoken young lady, who would be a first time buyer, asking why the taxes she pays should support borrowers when they've proved themselves to be a bad risk already, and that she cannot afford to join the property owning majority. Well said, that lady !

Hope for first-time buyers

The latest figures reported by members of the National Association of Estate Agents (NAEA) show that the first-time buyer (FTB)market is slowly increasing.

Chris Brown, president of the NAEA, commented: "Members have reported that the first-time buyer market is slowly increasing with 11.8% shown as the percentage share of first-time buyer sales in June. For first-time buyers who have the adequate funds in place and can secure mortgages, now is a time they can operate as opportunists and take advantage of the market and the properties and prices currently available.”

The figures indicate that consumers continue to remain unsure of the market. However, there was reported stability in the number of viewings before a sale is secured, time between instruction and the number of agreed sales which have fallen through.

Brown said: "Confidence needs to be restored and this can be achieved if the government, Bank of England, mortgage lenders and various other bodies work together to ease the pressure. We are continuing to call on the government to cut stamp duty for first-time buyers and move the threshold to give people a break. In addition, the Bank of England needs to ensure the mortgage markets are steadier. If consumers continue to find it hard to obtain mortgages how can the market place expect to move forward?"

First time buyers are the first step in the housing market. Without FTB's, the market does not move ahead, as they usually buy the first property in a chain, allowing other buyers to move up the housing ladder. Therefore it is important that FTB's are not priced off the housing ladder any more than they have been over the last few years.

Off course, First Time Buyers need mortgage advice, with 'Independent' mortgage advice being the best advice to have available. That's what I'm here for. You can contact me by using the links on the right hand side of this blog!