IMF calls to cap LTVs could harm consumers

Industry experts are warning of consumer harm from International Monetary Fund proposals for a cap on LTVs and tighter restrictions on loan-to-income ratios.

Earlier today the IMF said it was worried about the proportion of mortgages lent at high LTIs and house price growth rising to more than three times income growth.

In a statement on the health of the UK economy, the IMF said that macroprudential action will be needed later this year to keep housing and mortgage markets “buoyant”.

It said: “The recent increased activity may partly reflect a temporary rush to buy houses before higher transaction taxes on some home purchases took effect in April.

“However, if current housing and mortgage market trends persist, further macroprudential tightening (e.g., tighter LTI or loan-to-value limits) will be needed later this year to avoid financial stability risks that may arise from excessive household indebtedness.”

The proposals are laid out in a report by IMF staff and will be presented to the IMF board for consideration.

But John Charcol senior technical manager Ray Boulger has warned UK policymakers against introducing the IMF’s suggestions.

He says: “I think restricting LTIs is probably one of the most unhelpful things that the regulators can do as far as consumers are concerned.

“To have a blanket income multiple figure is completely illogical, on the basis that somebody with no other debts or heavy expenditure can clearly afford a higher income multiple than somebody that doesn’t. So either you think affordability is sensible, or you don’t. But there’s no logic to saying you should have affordability and income caps.

“As for LTV caps, that again is extremely unhelpful for consumers. You’ve got a problem because the agenda of the government is to encourage first-time buyers. First-time buyers are more likely to need a high LTV mortgage than other buyers. So if regulators impose an LTV cap, the people that are going to hurt most are the very ones the government is trying to encourage most.”

The IMF also suggested the buy-to-let market should also be subject to macroprudential measures similar to the owner-occupied market.

The Bank of England’s Financial Policy Committee is set to get powers of direction over the buy-to-let market later this year.

Mortgages for Business managing director David Whittaker says policymakers should be cautious about further buy-to-let changes.

He says: “Quarter one we all knew was going to be a big completion quarter. We’re not even six weeks into quarter two. So we’re not able to determine if there is any evidence the buy-to-let market is overheating and contributing to any form of dislocation in the main housing market.

“There are so many levers being pulled that I regard it as almost inconceivable that the FPC would find any legitimate reason to interfere. Even if they did, how would they know what they did changed the market?”

Association of Mortgage Intermediaries chief executive Rob Sinclair says: “A lot of people are doing things in this market, and our biggest concern at the moment is that a lot of these actions on the private rented sector and buy-to-let market have yet to come to fruition.

“Yet there are people who want to impose more controls on a market where controls have just started. We worry that too much will be thrown too quickly at it.”

A Council of Mortgage Lenders spokesman says: “We would urge policymakers take into account the potential risk of unintended consequences that may have adverse effects when considering future intervention in any aspect of the market.”

In June 2014 the FPC announced lenders had to make sure no more than 15 per cent of new lending was at income multiples of 4.5 or more.

The knee-jerk reaction from lenders was to restrict this type of lending. In mid-2014 around 10 per cent of new loans were at high income multiples, but this fell to below 7 per cent the following year.

But the cap has been questioned by bodies like the CML, which says these loans help tackle the problem of average household incomes falling behind average house prices.

CML figures released in late February showed lender appetite for high income multiple loans is bouncing back rapidly, displaying strong underlying demand.

In April the Prudential Regulation Authority published a consultation paper proposing to strengthen buy-to-let underwriting standards by insisting on a minimum level of stress testing to ensure loans remain affordable when rates rise.

However, the PRA was clear it was not suggesting supervisory guidance for LTV standards, though it says it expects firms to have “appropriate controls in place to monitor, manage and mitigate the risks of higher LTV lending”.