The FSA’s concern over the rapid rise in loans being taken out at increasingly high income multiples has received a mixed response from mortgage lenders.
Speaking at the recent Council of Mortgage Lenders conference, Howard Davies, chairman of the Financial Services Authority (FSA), warned delegates that the ‘worrying trend’ could place increased loan to value (LTV) loans in the ‘danger zone’ if London house prices fall.
Davies said: “What we have found is that there has been a continued upward trend in average income multiples since last year’s survey. That upper trend is reflected in the CML’s own trend figures which show that average multiples are now at or above the level at the height of the last housing boom in the third quarter of 1989.
“I am not in the prediction business, but clearly one cannot exclude the possibility of a fall in London house prices, which could put very high LTV loans into the danger zone,” he added.
A number of mortgage lenders have backed Davies’ speech, saying that income multiples of 3.5 and over could land borrowers in financial trouble should interest rates increase or house prices fall.
Martin Ritchley, chief executive of Coventry Building Society, said: “Davies’ point was very well made, as some lenders have, in my view, taken income multiples to excess.
“Although I accept there is a case for relaxation as interest rates have fallen over the last few years, multiples as high as five times seem to have gone a step too far. While there is no sign at the moment of a return to the situation seen in the early 1990s, it does not mean it will not happen.”
Other lenders, including Norwich and Peterborough, Mortgage Express, GMAC RFC and Portman, had a similar response, taking the stance that market stability does not necessarily leave the door open for increased risk-taking.
But sub-prime lender Future Mortgages said income multiples are an outdated method of determining affordability, and the responsibility should fall on the regulator rather than the lender to ensure customers do not overstretch themselves.
Michael Bolton, marketing manager at Future Mortgages, said: “Certainly from our perspective, it is the responsibility of the regulator to closely monitor what the industry is up to. Davies took a historical stance with reference to affordability. The interest rate climate today is very different to 10 years ago and most homeowners are adjusting their own household budgets accordingly.”