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Have LTI caps impacted lending levels? Marketwatch

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  • 08/10/2014
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Have LTI caps impacted lending levels? Marketwatch
The loan-to-income ratio was formally implemented on October 1. Following its announcement in June lenders were told to employ the spirit of the cap immediately.

In this week’s Marketwatch we ask if in the three months since its launch has the restriction on lending to borrowers at four-and-a-half times income or more made a noticeable impact on lending.

Some lenders came out immediately stating all lending would be capped at four-and-a-half times, we ask are brokers finding a greater reluctance to lend to first-time buyers which need an income stretch.

This week’s commentators are:

Dean Mason of Masons Financial Planning, says he has seen more clients suffer against affordability since the arrival of the new rules.

Ray Boulger, senior technical manager at John Charcol, believes this could signal the start of regulatory creep.

Ashley Brown, director of mortgage broker Moneysprite, says such caps are not addressing the real problems beneath the UK’s housing market.

dean-masonDean Mason, Masons Financial Planning

Interestingly it was my understanding that the loan to value ratios were ‘under consultation’ until the end of August when the announcement was made in July.

I don’t know who they were consulting but Santander and Nationwide had both of course tightened up their criteria by the end of July again, others likely did it less publicly.

It’s hard to tell whether the drop in the market has been the usual summer lull or whether the new limits have been a significant factor. From personal experience there is no doubt that a few clients have received knock backs on affordability that they would not have had, even withstanding MMR, in the last couple of months.

The sad thing is that market forces again take hold, those suffering are at the base end of the housing market, often where Help to Buy 2 has helped them see the dream of home ownership almost become a reality.

Mortgages over £500,000 are not presenting the lenders with similar affordability issues rather unsurprisingly, even if the clients position is actually slightly inferior to the former.

The fact is that as with MMR the lenders react predominantly before implementation meaning the October 1 introduction of LTV caps passed without event. The caveat to ‘protect’ smaller lenders is well intentioned, but the reality of how this helps healthy competition remains to be seen, as most of these lenders have had more cautious lending limits anyway since the crash.

boulger-rayRay Boulger, John Charcol

On average only 10% of mortgage lending was on an income multiple in excess of 4.5 when the cap was announced. A few lenders have subsequently announced an income cap on some or all of their business, although not normally at 4.5x, but some already imposed a behind the scenes cap.

One unintended consequence was partially addressed when in its first review of the scheme the FPC removed the restrictions from some smaller private banks.

So far the cap has not been instrumental in preventing borrowers from obtaining a mortgage of the size required but has meant in some cases such a loan has not been available from the first choice lender.

The danger of inventing new blunt instruments such as an income cap, despite its initial modest impact, is criteria creep. Now the cap is in the FPC’s armoury it is not hard to envisage the possibility of it being reduced from 4.5 in the future.

Although we will never see signs of a public turf war between the two regulators – the FCA and the PRA – there is now a clear conflict between these two regulators.

The FSA, as it was then, considered including LTI and LTV caps in the MMR but sensibly recognised that having decided to force all lenders to use an affordability model, an LTI cap was not appropriate.

This is unlikely to be the last conflict between the policy of a conduct regulator and a macro prudential regulator but as Help to Buy 1 has been extended by the government to 2020 it is hard to see how the FPC could impose an LTV cap lower than 95% before then, despite having asked for this power, as such a move would directly contradict government policy.

Macro prudential regulation should do what it says on the tin and not venture into the realms of micromanagement.

 

ashley-brownAshley Brown, director of mortgage broker Moneysprite

It was with some surprise that the Bank of England decided to ride roughshod over the good work that lenders and brokers had put into the MMR.

They appear to be using the very blunt instrument of loan-to-income ratios to tackle the perceived, and very real, risk of London house prices turning into another asset bubble.

Possibly by design, or by fluke, the LTI ratio the Bank set was broadly in line with most lenders post-MMR lending guidelines for an average customer. In reality, although the extremities may have been affected with reduced borrowing capacity, the mainstream bulk have been broadly unaffected.

When it comes to first time buyers’ borrowing capacity, we have seen very little change in terms of levels of borrowing. However, for the more adventurous first time buyers with little or no debt, there has been a marginal reduction in their ability to take on larger mortgages – they are still buying, but at slightly reduced amounts.

Last week the FPC declared its interest in altering LTVs and DTI ratios and as a natural capitalist I can’t help but think that markets should be operating without the undue interference of central banks or governments. There is a balance that must carefully be judged between protecting the consumer and allowing individuals to take calculated risks, in a free society, to achieve their ambitions and dreams.

The danger is that by using arbitrary multiples and financial instruments to ration lending, we are not addressing the underlying issue – a chronic under supply of housing in the UK. Creating medium term imperfections in the market won’t cure this and the unpopular, but honest, answer is to open up large amounts of green belt to build new towns on.

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