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BoE mortgage cap: The industry responds

Sarah Davidson

June 26, 2014

From October 1 lenders will need to ensure that no more than 15% of their total number of new residential mortgages are above a LTI ratio of 4.5.

Some are taken aback by the news, including Mark Harris, chief executive of mortgage broker SPF Private Clients.

He said: “It is surprising that the Bank of England feels this move is necessary.

“The heat has clearly come out of the housing market and virtually all mortgages are now done on a repayment basis.

“Borrowers are opting for fixed rates and when interest rates start to rise, wage inflation will improve.

“With all this going on, it is not clear why the Bank feels the need to get involved; lenders are broadly sticking to these suggested restrictions anyway.”

And Ray Boulger, senior technical manager of John Charcol, said: “There’s very few lenders who are doing more than 15%.

“If lenders were forced to apply the restriction on a regional basis rather than national it would have more of an impact.”

London

The general consensus is that capping high loan to income lending primarily impacts London lending.

Simon Crone, vice president of mortgage insurance Europe for Genworth, said: “Limiting the proportion of high loan to income mortgages is a well-intended move, but it will mostly affect London and adds to a series of interventions that encourage growth with one hand and rein it in with the other.

“To guard against the need for another re-think, we need to work towards a fully planned and sustainable framework that maintains a lasting balance in the mortgage market.”

Adrian Anderson, director Anderson Harris, agreed. “These new rules will have a much bigger impact on borrowers in London and the South East than elsewhere.

“More people in London are on basic salaries with a bonus element and this needs to be taken into account.

“Such a limitation suits a model where someone earns a basic salary and no bonus but doesn’t suit a more typical model for the professional working in London and the south east where bonuses form a large proportion of their remuneration.”

And Ray Boulger added: “If the bank does want to impact London prices – although bear in mind the market is already adjusting – it’s much better to introduce measures that are targeted in London without specifying so it picks up other expensive parts of the country.”

Approval

Paul Hunt, Phoebus Software managing director, supports the Bank’s move. “These are sensible recommendations announced by the Governor or the Bank of England’s in his statement this morning, and it is a little surprising that lenders have been lending at higher LTI ratios given the recent financial instability,” he said.

“Whilst we want to get people onto the property ladder it has to be in a way that is affordable in the long-term taking into account income potential and interest rates rise.

“The cap on higher loan to income ratios along with the stress test for lenders will also complement the affordability measures already implemented by MMR.”

And Lloyd Cochrane, head of mortgages at NatWest and RBS, which introduced a four times loan-to-income cap, said: “We recognise the need to manage any signs of pressure in the housing market and welcome the changes the FPC has made today.”

But Jonathan Samuels, chief executive of Dragonfly Property Finance, felt the Bank has not gone far enough with such measures. “Mark Carney repeatedly used the word proportionate to describe the measures announced in the Financial Stability Report but some might call them paltry,” he said.

“The jury is out on whether these measures will cool the property market down in any material way, notably in London and the South East. They’re a start but they may, with the benefit of hindsight, prove to be insufficient.

“There are caps, limitations and new affordability rules but they’re arguably limited in their effect.

“The Bank seems confident that household indebtedness at present doesn’t pose a threat to financial stability. This, to an extent, is the great unknown as we will only know the true threat once rates actually begin to rise.

“Testing people’s ability to cope with loan repayments at a rate 3% higher than at the origination of the loan is a sensible idea, as the interest rate up-cycle will pose a challenge to homeowners around the UK.

“Overall, it’s a mixed bag but then we’ve come to expect that from the Bank of England of late.”

Criticism

Graham Lock, director and co-founder of House Network, was concerned that the Bank is creating an unstable market with its meddling.

“Natural market forces will dictate and as a nationwide online estate agent, we’re already hearing slight rumblings of demand slowing and prices stabilising,” he said.

“The Bank of England trying to manipulate the market could cause panic and volatility to develop as people worry about the value and saleability of their homes.”

Paul Broadhead, head of mortgage policy at the BSA, was concerned at the impact the LTI caps could have on first-time buyers. “This type of blunt instrument is untested in the UK market and there is a risk of unintended consequences, particularly for first-time buyers,” he said.

“This group naturally need to borrow at higher income multiples, and can do so provided they meet affordability criteria. It is important that they aren’t pushed towards more expensive credit, despite being able to afford a mortgage.

Mark Harris also feels the move is too inflexible, as he added that conditions should be added for high-net-worth borrowers.

He said: “Many outgoings are fixed outgoings: if you are earning £40,000 you might not be able to afford 4.5 times income but if you are earning £400,000, it might be perfectly affordable to take on a mortgage that is six times your income.”

Insurance

Simon Crone wants the UK to emulate the Canadian Market, where a far higher proportion of mortgages are insured, either privately or by the government’s Canada Mortgage and Housing Corporation.

He said: “Mortgage insurance provides a more targeted and sustainable means of implementing sensible LTI limits and promoting good underwriting practice.

“Such a move would also provide much needed clarity on the future of high loan to value lending post-Help to Buy, which is more important than ever following today’s announcement.

“Moves to tighten affordability tests so soon after the Mortgage Market Review threaten to cast a further shadow over the first-time buyer market, which already recorded the slowest growth in April when the new rules came into play.

“The recovery of high LTV lending has relied on the government initiative, and the use of private mortgage insurance to fulfil this role beyond 2016 could support greater first time buyer activity while encouraging the necessary discipline to manage risk.”


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