The latest mortgage rules that were introduced recently are still settling in, however, some market experts think that they will cause a deceleration in lending.
Property market professionals are carefully observing the effects with the Bank of England (BoE) stating that they are hoping for less of the tremendous lending that the market has seen in the last 18 months. The extreme borrowings have caused speculations of another housing bubble, especially in London and the South East.
Some are concerned that some of the greater loan to income amounts among firs time buyers in London and the South East could become dangerous should interest rates increase.
However, the Government are intent on their housing led recovery stimulating the overall economy.
Lenders have revealed that they have already been practising under the new regulations, before their introduction on 26th April. Neil Hudson of Savills says that if this is true, then it is unlikely that there will be a substantial drop in mortgage lending in the next few months.1
Hudson thinks that the BoE’s Financial Policy Committee’s (FPC) authority to set tougher interest rate tests on new borrowers could be more of more significance.
He says: “The FPC is likely to get these powers in the summer and it may be during this period that we begin to see prospective borrowers struggle to get financing.
“Given the importance of first time buyers in the recent surge of market activity, any limit on their ability to borrow relative to current trends could lead to a slowdown in both house price growth and overall transaction levels.
“Unfortunately, this would also lead to prospective first time buyers remaining trapped in the private rented sector. Therefore, any move by the BoE to minimise threats to financial stability via the housing market should also be met by support from the Government for the private rented sector.”1
Concerns over Effects of New Mortgage Rules in UK
Cash buyers could play a vital role in keeping the property market up if there happens to be a slowdown in lending. After the recession, cash buyers played an important part in pushing market activity. The last year has seen more than 400,000 cash only transactions, not just from foreign investors or buy-to-let landlords.1
Savills claims that cash only buyers are just as likely to be those downsizing and home movers. They even revealed that they could be replacing mortgage movers in some markets.
Hudson says: “At a fairly constant 35% of total market transactions, even during the last year, the scale of cash buyer activity will dilute any intervention in the market by the BoE, but should not prevent that intervention.”1
Some lenders have already begun taking action to limit high loans. Lloyds Banking Group, who offer mortgages through the Halifax, Lloyds Bank, the Bank of Scotland, and Scottish Widows Bank, has said that they are changes their policy for new high value mortgage lending.
From now, if the mortgage lending on a property is more than £500,000, Lloyds Group will evaluate the mortgage application by using an income multiple limit of four. They described move as a “targeted policy change”1 designed to tackle inflationary pressures seen in the London property market.
Lloyds Group’s Director of Mortgages, Stephen Noakes, says: “Whilst the housing market outside of London is starting to improve, the recovery is fragile and prices largely remain below their peak. It is important we don’t disrupt this recovery.
“But in London, house prices are almost now 30% above the 2007 peak. This is largely driven by issues of supply, which are particularly acute in London, and this is having an impact on income multiples which are failing to keep pace with asset growth.
“We’re not seeing such issues across the rest of the UK and therefore this is a targeted response to an issue largely in the upper tiers of the London housing market. This prudent update to our lending policies is intended to manage risks to our business and for our customers.”
Noakes went on to explain that the Group still supports the Help to Buy scheme, as it has boosted the housing market: “Help to Buy is not one of the factors driving London house prices.
“Just 2% of purchases in London in 2014 have been through the scheme with the significant majority of applications coming from the rest of the UK.”
Noakes adds that the Group predicts the policy change will affect about 8% of their lending in London.1