In his Mansion House speech Osborne said this was to mitigate any future risks to the housing market.
The announcement follows the decision by the two state-owned lenders, Lloyds and Royal Bank of Scotland, to cap income multiples at four times income for properties worth £500,000 or more; effectively the London market.
In this week’s Marketwatch we have asked our panel of experts if the Bank should have the power to influence lenders’ underwriting and risk policies and whether income multiple caps are best way of protecting borrowers from market instabilities.
Alan Cleary, managing director of Precise Mortgages, says income multiple caps are a blunt instrument which do not reflect a borrower’s true affordability
Harry Arnold, associate at broker Anderson Harris, says capping income multiples is punishing the aspirational classes we should be trying to encourage
Alex Hammond, head of marketing communications at Kensington, says income multiples have become less relevant as the workforce changes towards self-employed and contractors
Alan Cleary, managing director of Precise Mortgages
Affordability is at the heart of MMR and it is perfectly logical for the Bank and the regulator to want to ensure people can afford the loans they take out. Financial stability is one of the Bank’s core objectives and I think we all know the consequences of a dysfunctional mortgage market.
However, income multiple caps are not the best way to protect borrowers as they are such a blunt instrument and do not really reflect an individual borrower’s affordability at all. Lenders are not in a position to control macro-prudential risks so it is necessary for those powers to be given to a regulator.
You only have to look at the second charge market to see that if lenders are left unchecked the market can become dysfunctional. Very few lenders in the second-charge market use affordability models to assess borrower affordability and even less stress borrower’s income for future interest rate rises.
The other key plank of MMR is income verification. Lenders must verify that the borrowers income is real; obviously if lenders base their affordability tests on income that isn’t real that will eventually lead to macro-prudential problems.
On balance I believe the Bank and the FPC are well positioned to manage risk in the mortgage market but I do not think income multiple caps will be the most effective.
Forcing lenders to stress individual borrower’s income for future rises in interest rates and verifying borrower’s incomes are much better examples of managing the risks.
Harry Arnold, associate at broker Anderson Harris
Mark Carney seems convinced that banks are dishing out risky mortgage loans by the bucket load.
Two lenders – Lloyds and RBS – have already ruled out mortgages above £500,000 at more than four times income and other lenders could follow suit.
In truth any multiple above four is slightly aggressive and, especially when interest rates begin to rise, some borrowers could find themselves overly indebted and heavily exposed.
Are mortgage caps necessary? The Mortgage Market Review has already been introduced to ensure that borrowers don’t overstretch themselves. It makes sense to be prudent when it comes to lending levels as borrowers taking on more debt than they can afford could cause widespread damage to the economy later on, when interest rates rise.
Unfortunately the problem remains; people simply do not earn enough money to buy the houses they want without some fairly aggressive lending from the banks.
Only when the recovery evens out and is reflected in the pockets of the wage earners in the UK will people be able to borrow conservatively to be able to live in South East England.
Much of the housing market in London is fueled primarily by foreign money and the Bank of England can’t control this by raising interest rates or capping mortgages.
To really make a change the government needs to step in to help build homes, not luxury properties, that are affordable to the average London worker.
Until then the capping of multiples only serves to punish the very same aspirational class we should be encouraging in order to grow the economy.
Alex Hammond, head of marketing communications at Kensington
It is pleasing to see that high profile public debate about the stability of the property market is happening now while prices are rising rather than being deferred until it is too late.
However, the problem with high profile public debate is that it is often dumbed down to appeal to a mass audience, which means that much of the important nuance is overlooked.
In this instance I think we are getting too caught up with the role of income multiples. Yes, they can provide useful shorthand in understanding how much someone can borrow, but the information is too superficial and doesn’t take true account of affordability.
Two individuals with the same income may have very different circumstances when it comes to financial commitments. Their ability to make mortgage payments and a key thrust of MMR is that lenders need to assess a borrower’s true position in terms of outgoings as well as income.
This situation is further complicated when you consider the changing nature of the nation’s workforce.
Statistics released by the Office for National Statistics last week show that there are now 4.54m self-employed people, which represents growth of 8% in the last year.
Once an individual’s earnings become more complex either through self-employment, contractor arrangements or regular bonus or overtime payments, then income multiples become even less relevant.
So, while it is healthy to have the debate at this stage, we must also be mindful that this debate is not dominated by shorthand understanding but gives true weight to the detail and nuance that will ultimately dictate the outcome.
