FSA Plan to Limit Mortgage Lending will Hurt First Time Buyers
Posted on 17 March 2009 by
John Charcol has issued the following press release today on the FSA's crackpot idea to limit mortgages to 3 times income, regardless of borrowers' ability to afford more or the level of interest rates:
Commenting on the news that the FSA is tomorrow likely to announce a limitation on mortgage lending of more than three times a borrower’s income, Ray Boulger of leading UK mortgage broker John Charcol said, “The Government has said that it wants to help first time buyers. Limiting them all to borrowing a maximum of 3 times income will surely do the exact opposite. Why should someone who chooses to allocate a higher proportion of their income to their home than someone else for whom a maximum of 3 times income may be appropriate because they choose to spend more on, e.g. cigarettes, alcohol, eating out, clubbing and holidays, be penalised?
“Furthermore, if mortgages are limited to 3 times income many borrowers who have borrowed more than that, but have a perfect credit rating, would be denied the opportunity to remortgage or move house, and would therefore be at the mercy of whatever uncompetitive rate their current lender chose to offer them, in the knowledge that they were a totally captive customer.
“While 3 – 3.5 times income was the norm 20 years ago when mortgage rates were frequently well into double figures and it was necessary to budget for rates up to about 15%, in a low interest rate environment a higher level of borrowing is clearly more affordable. Rates will of course rise significantly from current levels; however it is surely unlikely that Bank Rate will have to shoot back up into double figures in the foreseeable future.
“The FSA has previously encouraged lenders to use “affordability” instead of income multiples as the basis for deciding how much to lend and all the major lenders have adopted this approach over the last few years. Going back to old fashioned income multiples would be a seriously retrograde step and particularly so with a multiple as low as 3.”
There are many factors other than income to take into account when deciding how big a mortgage is affordable, including:
- Interest rates.
- Whether the rate is variable/a short term fix/a long term fix.
- Single or joint applicant.
- No of dependents, if any.
- Other financial commitments such as loans, credit cards, maintenance payments.
- The amount of income (someone on a high income can afford a bigger multiple than some on a low income as a smaller proportion of income is needed for other necessities).
Categories: Property market, Mortgages, Regulation
The blog postings on this site solely reflect the personal views of the authors and do not neccessarily represent the views, positions, strategies or opinions of Charcol Limited. All comments are made in good faith, and neither Charcol Limited nor Ray Boulger will accept liability for them.
Vince says:
First, I was listenning BBC4 this morning and I can tell you that you do not impress the financial industry!
First, capping the mortgage is an important solution to fix this crisis quickly rather than carry on.
Second, you are biased as your business will depend on the size of the mortgage authorised.
Third, if you understand how bonds work, you will notice that it does not mater whether the interest are high or low given that you need to take into account the full maturity of the loan (and not the next five years).
Fourth, UK market rely on LTV which has introduced one of the most volatile refinancing revenues.
Proposed idea is rather to fix the interest rate on the full maturity of the loan!! It will save part of the crisis.
Additionally, you have mentioned this morning that the crisis is due to derivatives and ABS. It is completly false. Derivatives have only been created because of need for the bank to release their risk on their own balance sheet. It was created by the constant mortgage growth with crap credit check and overleverage (high LTV).
I think there is a lot to learn on your side. Obviously, it is high time to change our thinking. If you are not prepare to change yours to fix this crisis, the bubble will restart again in couple of years. Take your responsibility.
Rob H says:
J. Anderton says:
Erm, those who spend 4/5/6 times income on a mortgage tend to continue doing all of the above. That's one of the reasons we have this current financial crisis. Personal debt in the UK is the highest in the western world.
3x salary is what acturies calculate as being sustainable LONG TERM. Are these people wrong and the wizards at Northern Rock, RBS et al correct?
Paul says:
You make speak for certain interests in the property market, but certainly not for first time buyers.
Rob H says:
One thing that he said, really proved that Charcol don't care about FTBs. He said that single people should be allowed to borrow much more than married people with children.
What of society? How will families afford a decent sized home if they are competing with 20 something property tycoons for space?
Do any of you actually care? I think not.
Stop pretending you care about first time buyers. It's just a marketing ploy to tug the heartstrings of a weak government.
jim says:
David says:
Asset price inflation in recent years has been caused by reckless provision of credit and under-pricing of risk. We all need to fix this
forex creditcard says:
Weebrabew says:
Good Day.
It looks like we have similar ideas on this subject.
Ian Powell says:
The fat kids need to go on healthy diets.
House prices will stablise when the regulation comes in, avoiding it will delay the bottom and we will face years of slow deterioration.
If we don’t, expect 8 long years of recession, whilst we inflate our way out of the mess.
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