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Mortgages: borrowers hit by double whammy of restrictions
Getting a mortgage has been made tougher by a gold-plating of affordability rules.
by Michelle McGagh on Aug 01, 2014 at 12:08
Borrowers are being hit by a double whammy of hurdles as both the government and the regulator attempt to close down on risky mortgage lending.
In the space of three months borrowers have seen the mortgage rules tighten significantly. At the end of April the regulator introduced the ‘mortgage market review’ (MMR) which toughened up the affordability rules around mortgage lending and forced banks and building societies to ask more in-depth questions about borrowers’ spending habits.
This was followed in July by an announcement that chancellor George Osborne had given the Bank of England new powers to cap the loan-to-income ratios on new mortgage lending, meaning banks will have less scope to lend to those on smaller incomes.
It could be argued that the introduction of these stricter rules has managed to rein in an overheating property market, with growth in the London area slowing to just 0.1% in June after surging 16.4% over the last 12 months, while prices in the rest of the country have been flat since May, according to Land Registry data.
However, for those still trying to get a foot on the property ladder or even move home, the changes mean they have to navigate two lending obstacles.
Ticking the boxes
David Hollingworth of independent mortgage broker London & Country said the affordability test brought in by the MMR was the ‘primary test’ and the ‘one that will be of more concern to more borrowers’.
‘The MMR has affected the amount [people] can borrow because [lenders] ask about more areas of your finances; pension contributions and childcare costs, which were not previously a factor [when borrowers were asked about spending] are now being taken into account,’ he said.
However, he added that even though a borrower may be an ‘outstanding candidate’ who ‘sails through’ the affordability test ‘they may still find lenders putting a lid on what they can borrow because of the [loan-to-income] cap’.
Nationwide is the latest lender to announce a cap on lending at 4.75 times income, and Lloyds and Royal Bank of Scotland – both owned by the taxpayer – have set a limit of four times income for property over £500,000.
Hollingworth said borrowers needed 'to be aware [of the caps] when pushing the outer limits [of their loan-to-income ratios]’.
He said the use of income multiples on top of affordability rules was essentially ‘gold plating’ of the lending rules, although he did not predict lenders rushing to place income caps on their mortgages.
While the income cap will impact everyone, those who are stretching themselves to afford a home will be the most affected, particularly first-time buyers.
‘It depends on the individual. You may live in London [where house prices are very high] but you may be buying with substantial equity because you enjoyed house price growth from a current property – in those circumstances [an income cap of] four time income may still be achievable,’ he said.
‘Those who are pushing for more [mortgage] like first-time buyers are the ones that are having to stretch.’
This goes some way to explaining the worrying increase in the number of young people unable to leave the family home. A report by housing charity Shelter revealed 1.97 million working adults between the ages of 20 to 34 are still living with their parents.
Half of this ‘clipped wing’ generation live with their parents because they cannot afford to rent or buy their own home, the charity said.
If the rules around borrowing weren’t tough enough, the MMR has encouraged lenders not just to grill borrowers on their spending but introduce more rigorous stress testing of their ability to pay their loan.
This means that instead of calculating affordability on today’s historically low 0.5% interest rate, banks and building societies also have to calculate whether a borrower would be able to afford a loan at a higher rate.
It goes without saying that interest rates will rise at some point in the near future, and Bank of England governor Mark Carney has intimated the rate could reach 3% in 2017, but lenders are pushing way above this level when it comes to stress testing.
Nationwide has announced it will impose a 6.99% stress test, meaning a loan will be judged on whether it could be paid back if rates hit that level.
For example a loan of £200,000 with a mortgage rate of 3.5% would cost £626 a month but at a rate of 6.99% the cost jumps 40% to £883.
Hollingworth said affordability was the ‘key hurdle’ as it contained two challenges of day-to-day spending and stress tests.
‘The other challenge…is increasing stress rates,’ he said. ‘The rules require lenders to look at affordability today but if rates increase how does that affect your affordability in the future? Stress rates are getting higher.’
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