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Mortgage-lending caps must not hurt first-time buyers
Limits on lending may help avoid property bubbles, but it's important first-time buyers can access high loan-to-value (LTV) mortgages.
by Lorna Bourke on Jul 25, 2012 at 08:07
The International Monetary Fund (IMF) is back on its regulatory hobby horse, pushing for new powers for the Bank of England to curb the amount that homebuyers can borrow in order to prevent damaging property price bubbles.
The chancellor, George Osborne, floated the idea of capping the proportion of a property's price that a buyer could borrow back in February. However, the notion of limiting loan to values (LTV) drew almost universal criticism as a blunt tool that would cause considerable unintended harm to consumers – particularly first-time buyers.
Mortgage book controls
Clearly, some form of lending constraints in boom times may be necessary. LTV restrictions might work to prevent overheating of the mortgage market and excessive risk taking – if they are imposed on lenders’ total mortgage books.
This would leave them free to continue to offer 90% or even 95% loans to support the first-time buyer market, provided their overall LTV didn’t exceed whatever maximum the Bank of England thought appropriate at the time. Lenders would simply need to control the mix of mortgages granted.
Similarly, the Bank might need powers to restrict the amount of net new mortgage lending overall, or tie it to new house building to prevent demand massively outstripping supply, forcing up house prices and mortgage lending.
Those who argue that the real problem is loan multiples are largely wrong, as affordability when measured by income multiples is also a function of interest rates.
In affordability terms a loan of three times earnings at 7.5% – which was the average borrowing cost as recently as 2008 – costs the same in monthly repayments as a loan of four and a half times earnings at today’s first-time-buyer rate of around 5%. In any case, crude multiples of earnings have now largely been replaced with detailed assessments that take account of the borrower’s total income, outgoings and financial commitments.
But 'tick box’ mortgage lending based entirely on computer-generated credit ratings and affordability has its limitations too, and can also hurt consumers.
This rigid approach may work when applied to those who are an A1 credit risk and only need a low loan to value mortgage. But as we have already seen, it can completely stifle the all-important first-time-buyer sector, which in a healthy market has accounted for 50% of the market by number of loans.
First-time buyers under pressure
Lenders must have discretion to continue to lend to these hopefuls – and other ‘non-standard’ borrowers – if homeownership is not to become restricted to middle-class homebuyers in conventional jobs, fortunate enough to be able to call on family members to produce the deposit.
With rents continuing to rise the ability of first-time buyers to save the deposit is diminishing by the month. More lenders should be prepared to take into account the level of rental payments over the year prior to a mortgage application if the potential borrower has only a small deposit.
In many cases rent, which has demonstrably been paid, is higher than the proposed monthly mortgage repayments. As mortgage lenders tell us all the time, the real security for the mortgage is not the property, but the borrowers’ ability to make the monthly repayments – and, equally important, their commitment to doing so.
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