Experts warn that Bank of England Financial Policy Committee threats to increase lenders’ reserves could decrease the supply of high-LTV mortgages
First-time buyers and less well-off borrowers will be hit if the Bank of England carries out mooted plans to crack down on what it considers risky mortgage lending, experts warn.
Last month, the Bank’s Financial Policy Committee said there has been “a gradual loosening in credit conditions in the mortgage market in recent years” for owner-occupier loans.
The committee says lenders are doing more high-LTV lending, which is also becom-ing cheaper. The FPC also notes that lenders are lending for longer periods and are testing the margins of income multiple limits. The FPC says mortgage underwriting standards in these areas are a “pocket of risk”.
The Bank is responding to this by leaving the door open to ordering lenders to increase their financial reserves. If this happens, a recent boom in high-LTV and longer-term lending could be undone as lenders will be forced to raise rates or reduce the amount of this type of lending they do.
Last month, the number of 95 per cent LTV deals topped 300 for the first time in nearly ten years, according to Moneyfacts.co.uk.
Much of this has been driven by lenders’ need to shore up declining levels of new mortgage lending in other areas. But this has been a welcome relief to first-time buyers who generally require higher LTV deals.
Association of Mortgage Intermediaries chief executive Robert Sinclair believes that raising lenders’ capital buffers is bad news for borrowers with affordability issues. He says: “It takes profit out of the marketplace, so you have to either raise prices or do less.”
John Charcol senior technical manager Ray Boulger says: “I take the view that this is the wrong approach [by the Bank]. Lenders will need more capital to support high-LTV mortgages. So they will have to price them a bit higher.
“It will reduce competition, and that is clearly not good news for consumers. Despite rates edging up we generally haven’t seen fixed rates go up, and that is because of the amount of competition in the market.”
The Building Societies Association mortgage policy officer Robert Thickett says: “Any move to place further restrictions on lending, or increase costs to lenders, risks having a knock-on impact on the housing market.
“We still have a housing crisis where affordability remains a key issue for the next generation of would-be homebuyers.
“Lender support for borrowers with smaller deposits has played its part in supporting a market challenged by rising house prices and stagnant wage growth.”
Building societies have also led the way with stretching the length of mortgage terms to help affordability, one area the FPC is concerned about.
Thickett says: “Many building societies are also providing support to borrowers in retirement – close to half of societies lend up to 80 or 85 years and a further 16 societies now have no age limit.
“At the same time, even where loans are at a higher LTV, LTI or longer term, the affordability rules brought in via the Mortgage Market Review have ensured that borrowers can comfortably manage loans even in a higher interest rate environment.”
Sinclair does not believe that lenders have become complacent. He says: “I don’t see a lot of evidence that the market is getting too liberal. There are still a lot of people frozen out from getting the best rates in the marketplace. But margins are compressed, which is a profitability issue to lenders in the long term.”
UK Finance, incorporating the former Council of Mortgage Lenders, also says the underwriting behaviour the FPC singles out is not risky.
UK Finance principal, analytics James Tatch says that regardless of the Bank’s cap on lending above 4.5x income, “every new residential mortgage is underpinned by responsible lending requirements”.
He adds that lenders go beyond LTI, which the FCA notes does not take into
account the total level of household income and how that affects homes’ finances.
Tatch says lenders look at affordability over the lifetime of the loan, not just at the point of sale, and stress repayments to make sure lenders can handle interest rate rises. He adds: “This ensures that all regulated (homeowner) lending is affordable, from the lowest to the highest LTIs.”
Sinclair also suggests that the first-time buyer market could slow down naturally anyway, without the need for the FPC to put the brakes on lending. He says the end of the Funding for Lending Scheme and the Help to Buy scheme could encourage this.
But others are of the opinion that the FPC is right to be worried and that market conditions leave it with no choice but to take tough action.
GPS Economics director Gary Styles says: “If we are moving towards a situation of softer house prices and interest rates going up – albeit modestly – then you can understand the reasoning behind them asking questions about the increase percentage of loans that are higher-LTV.
“They are the ones that will be most exposed to those two things – higher interest rates and lower house prices.”
But Styles notes that any move to raise lenders’ buffers is a ‘double-edged sword’ because there is a social need to ease affordability.
It would also hit lenders, he says: “We have needed to see more lending going on. If you take remortgaging out there is a real softening. So lenders are having to migrate to slightly higher LTV brackets just to keep the lending going.
“If you find you’re not doing enough volume, your only option is to go into other sectors. There is no doubt in my mind that is happening.”