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 !
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 !
Labels: affordability, council of mortgage lenders, first time buyers, government
posted by Des Tourick 1st Call 4 Mortgages at
10:20
0 Comments
Links to this post
