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Why we should tailor lending to the London housing market – Marketwatch

  • 09/12/2015
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Why we should tailor lending to the London housing market – Marketwatch
It is often said that London is like a separate state, independent of the rest of the UK. At a conference held by The Financial Services Forum last week, that idea got more forensic still to suggest the capital actually behaves like several different countries.

Land Registry data for October puts the average London property price at just over £500,000 which compares to the nationwide average of £186,000. However, within the city itself property prices vary vastly. Average prices in areas such as Bromley or Croydon range from £290,000 to £400,000 while Hammersmith, Fulham and Lambeth stretch up to £835,000.

Over 8.6 million live in the City of London pushing it to its highest level since 39%, with Mayor Boris Johnson predicting that this will rise to 11 million by 2050. Londoners are moving further out to be able to afford a home at levels which still outpace the rest of the country. Being able to use all sources of income to secure a mortgage is crucial but lenders’ nervous attitude towards accepting multiple sources of income and assets to support the loan can be prohibitive.

Analysis by Savills found that for a first-time buyer couple trying to purchase a property at the average London value of £500,000 with the minimum 5% deposit at an illustrative rate of 4%, would need an income of £105,556 and would be spending 29% of their income servicing the loan.

This week our panel of experts consider how lenders’ policies need to evolve to better suit the needs of  London’s aspiring and existing homeowners better.

Andrew Montlake, director at Coreco, says that the lending market should adopt its own form of devolution, so that lending policies vary according to region and help first-time buyers get a foot on the housing ladder in London.

Steve Griffiths, head of sales and distribution at Kensington Mortgages, believes that lenders should take note of the capital’s diverse workforce and varying sources of remuneration when assessing individual affordability.

Andre Botes, mortgage and protection consultant at ProtectMe, explains that affordability should be tested on the grounds of an individual’s proven ability to repay the loan, rather than following strict criteria to the letter.


Andrew Montlake CorecoAndrew Montlake is a director at Coreco

In the political arena there have been moves towards devolution for different geographical areas, so why are lenders reticent to have separate lending policies for areas like London? After all, private banks and local building societies have had such policies for years, yet London often suffers from the same old tired criteria and products.

As the population in London continues to grow, age, introduce different working patterns and become even more diverse, we need a whole host of fresh policies for today and the future.

Perhaps most importantly, we need to open up the mortgage market further to flexible working patterns, such as contractors and the newly self-employed. We need a better understanding of the new-build market to make sure that there is mortgage availability at higher loan-to-values (LTVs) for buyers after the Help to Buy schemes close.

We need lenders who can deal effectively with large loans, offering policies such as interest only to the right type of clients and giving them more flexibility with fixed rates and no penalties.

We need to deal with the aging population and ensure there are options available, as well as looking at the key issue of where workers are going to live as they struggle to deal with higher house prices.

Buying is not the only issue and we still need a generation of landlords who can offer rented accommodation. So we need policies that can deal with low yielding buy to lets, longer-term tenancies and loans to limited companies.

There are a myriad of issues to tackle and a London Lending Forum to address is a good start.


Steve Griffiths picSteve Griffiths is head of sales and distribution at Kensington Mortgages

There are a number of interesting dynamics that feed into the London property market, and much has been made of the impact of foreign investment into prime London developments. However, the biggest single defining factor of the London property market is the population density.

If London were a country, by population it would be the eighth largest country in Europe. According to ONS statistics, there are 5,285 inhabitants per square kilometre in the capital, compared to the UK average of 263 inhabitants per square kilometre. This means accommodation is in high demand and therefore expensive, so affordability is a key issue.

So what can lenders do to combat this while maintaining a responsible approach to lending?

London has a diverse workforce and varied means of remuneration. The number of self-employed workers and contractors is increasing. Many City workers receive bonus payments in addition to their basic salary, often as vested shares, and there are thousands of people working more than one job.

We underwrite the individual and look at all of their sources of earned income to ensure that our assessment is based on their true circumstances, and this could be the difference in whether or not they can demonstrate the affordability to buy a property in the capital.

Once we can assess true affordability we then look at how to provide customers with more options regarding the property they buy and the way they repay their loan. This means taking a realistic approach to the different property types that are prevalent in the capital. At the same time, realising that interest only can still be an appropriate choice for some customers who may earn significant regular bonuses, or be planning to downsize and move to a cheaper area at the end of the mortgage term.


Andre Botes Protectme

Andre Botes is a mortgage and protection consultant at ProtectMe

Most of the enquiries that we receive have one of the following issues; either the clients do not have a large enough deposit to purchase their desired property, or they do not earn enough to afford the mortgage.

Help to Buy is a fantastic incentive to aid with the initial deposit and, as of next year, this incentive will go up to 40% in London. The only issue with this is that it only applies to the new-build market. We all know that this is to help the market as a whole and to encourage people to purchase new-build properties rather than charming old London homes. But why not try to incentivise the whole market?

Lenders are very strict on affordability these days but, as a Londoner that has rented and also owned a home, the difference is stark. A one bedroom flat in Bermondsey will set you back £1,400 per month excluding bills – if you are very lucky – and it will most likely it will be an ex-local authority property.

Why do we not work out affordability on the client’s proven ability to repay the loan rather than on strict affordability criteria? Perhaps, on a first-time buy, we can help people get onto the ladder and stretch the criteria and income multiples. We could look at the controversial ‘repayment methods’ to make the loans a bit more affordable. Should we even talk about low start and interest only mortgages?

I truly believe that we should develop the idea of affordability by assessing clients individually, rather than trying to make square pegs fit through round holes.

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