When the dream overwhelms reality

We are fast approaching the season of joy and goodwill but we can all see that what is always an expensive time of the year has all the signs of being even more so this year, as the Monetary Policy Committee plots the extent of the next Bank of England base rate increase.

The problem is that the mortgage industry’s recent enthusiasm for raising the ceiling on borrowing limits for secured lending has resulted in many borrowers being stretched too far. And coping with the repayment hike the next rate rise brings will see chickens the size of Christmas turkeys coming home to roost.

It’s all very well lenders pushing the boat out and increasing their lending multiples to get more impressive numbers but do they focus enough on the ‘how’ and ‘to whom’ this largesse should be applied?

Even if they do, which I doubt, as an industry we’re great at selling the benefits of home ownership and manipulating the financial gears to get people there but not so good at expounding the merits of restraint. In fact, it appears that we’re more concerned with helping home owners to overcommit themselves than we are at counselling caution.

I am reminded of how endowment policies were once sold – even when they were sold properly. Times were good, interest rates delivered decades of growth and few believed that an endowment-linked mortgage wasn’t a good thing. Could this be the destiny of mortgages for house purchase? Do mortgage interviewers and would-be home owners focus sufficiently on attitudes to risk?

I think not. The dream overwhelms the reality. But this will not be the case when in 10 years’ time they’re complaining to the regulator that their lender and broker were responsible for their financial penury by propelling them into a mortgage mire from which they couldn’t escape.

And believe me when some of today’s lending decisions are looked at, they’ll not only fail to stand up, they’ll be flat on their backs waving a white flag. It won’t happen, I hear you say. But wouldn’t we have said that of endowments a few years ago?

So, I’m not impressed by lenders that exalt lending multiples that allow applicants to get even deeper into debt. I’m saddened that they are still clinging to an assessment of borrowing potential that I thought sailed with the Ark.

I’d be more impressed with an affordability formula that provided better protection for borrowers against their own stupidity and actually made provisions for the rate rises that inevitably accompany every loan.