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Is Capping Income Multiples On Mortgages The Future?


In the past few weeks we have seen moves by two lending giants, Lloyds Banking Group, (incorporating Halifax, Scottish Widows & Bank of Scotland) and RBS / Natwest which has seen them limit loans above £500,000 to four times income multiples.

There seems to be no coincidence that the two partly state owned banks are the first ones to act in this manner and it would be interesting to know whether this was an act totally of their own volition or involved some government coercion.

Either way moves such as this highlight the level of worry there is around house prices spiralling further out of control in London, despite the fact that anecdotal evidence suggests prices may have reached a plateau and the Mortgage Market Review is beginning to have an effect.

Much of the focus in the next few weeks is on that catchy phrase Macro Prudential Regulation which, as one journo put it, is a complicated way of saying that the Bank of England may make it harder or more expensive to get a mortgage in the future, in order to deal with these worries over house prices.

At present other lenders are biding their time over whether to follow, preferring instead it seems, to wait until they are explicitly told what to do by the Financial Policy Committee, (FPC) which meets in June and will release its’ new requirements in the last week of June.

The FPC was established with responsibility for “identifying, monitoring and taking action to remove or reduce systemic risks with a view to protecting and enhancing the resilience of the UK financial system”.

As such it has the power to insist mortgage lenders impose loan-to-income or loan-to-value caps, as well as insisting lender hold more capital against loans or cutting the Help To Buy Scheme.

The question of course is whether moves such as this will have only a minor effect as many people buying at this level who need a mortgage already fall within these income multiples. Furthermore, it does not deal with some of the deeper underlying issues of lack of good quality homes in high demand areas many of which are snapped up by cash buyers, foreign nationals and buy-to-let investors.

There is also a danger, that too much intervention can have a disproportionate effect and send the economy staggering once more. It is a balancing act the FPC cannot really afford to get wrong.

What it does do however, is underline a change in sentiment that house price rises will not be allowed to increase forever, which in turn puts more doubts in the mind of buyers when faced with higher prices and makes the Bank of England’s next move that little bit easier.

For those borrowers looking to buy or remortgage and borrow above the £500,000 level who think they may need more than 4 times income multiples, it does make sense to act sooner rather than later.

Whatever, does or does not happen this month, the political manoeuvrings around the subject of housing is set to turn up a notch.

I do believe housing will be a central theme of the election campaign and let’s hope that given the undoubted social and economic importance of this sector the next Housing Minister holds a serious cabinet position.

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