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Going cap in hand

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  • 23/03/2009
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Be afraid, be very afraid…actually, don't be. The long-awaited Turner Review was not the terrifying ...

Be afraid, be very afraid…actually, don’t be. The long-awaited Turner Review was not the terrifying document that some had anticipated. Regardless of Hector Sants’ warning last week that people should be ‘very frightened’ of the FSA, chairman Adair Turner’s report is actually a fairly considered one, containing in its 126 pages material from a range of existing FSA consultation papers and EU reports, many of which are already being implemented.

The one thing that mortgage lenders, brokers and borrowers were dreading was an announcement that mortgage loans would be restricted to three times income. A story leaked to the BBC in the morning before the review’s publication indicated just that. However, the review merely recommends that this issue be discussed and a decision made by September.

It is essential that the industry lobby Government hard on this one, as the concept is plainly nonsense. Of course, many years ago, a maximum three times income loan was the norm – but then, interest rates were in double figures and mortgage rates hit the giddy heights of 18%. With base rate on the floor and many mortgage rates below 5%, higher multiples are appropriate in many cases.

Of course, it is important to factor in rate rises when calculating affordability, but can anyone seriously see them going to 15% in the foreseeable future? A blanket cap on multiples would ignore all of the subtleties and nuances of today’s sophisticated affordability calculations. And such a move would be a death blow to the current UK housing market.

The average UK income is less than £30,000, giving a maximum loan size of less than £90,000 under the proposed rules. The average property currently costs around £160,000. Go figure. Capping mortgages at three times income would either freeze first-time buyers out of the market completely, at a time when the Government is throwing hundreds of millions of pounds into schemes to help first-timers and the lower-paid, or it would force a dramatic and unrealistic collapse in property values, just as they are correcting themselves rationally.

The Turner Review also suggests that 100% mortgages could be banned and a 95% LTV ceiling introduced. In a market where products with such high LTVs don’t actually exist, and the number of mortgage products available at 90% LTV has been decimated, I’d say that this question is looking fairly academic.

Brokers should take a good look at the govern­ment schemes mentioned above. The Treasury has pledged £700m of new money between now and next April to help borrowers with household incomes of less than £60,000 onto the housing ladder via the MyChoice Homebuy and Homebuy Direct programmes.

Essentially, the Government (and with Homebuy Direct, the developer concerned) provide an equity loan of 30% of the property’s value, and the borrower then gets a traditional mortgage, via a broker, for the remaining 70%.

There are a lot of people out there who qualify for these schemes; far more than the 10,000 the Government is initially targeting. There don’t appear to be many rules or strings attached to the schemes, and apparently the Government really wants to spend the money. Borrowers don’t have to be key workers, just a single person or a couple earning less than £60,000.

We have carried out research in this area (see Brokers Homebuy Curious, page 2) as part of our Clarify Homebuy Campaign, which reveals that very few intermediaries have considered getting into this market. Given its potential, perhaps many more should – it could be a very welcome and lucrative new revenue stream. Advisers don’t get paid by the Government, but receive the usual proc fee from the lender. We plan to carry regular features on Homebuy over the coming year, hopefully turning you on to an entirely new sector.

Interestingly enough, under Homebuy affordability calculations, the maximum value of property that can be purchased using the schemes is £300,000. With the schemes aimed at those earning less than £60,000, that would certainly have to change if the three times income cap comes in. n

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