Bank of England warns of tougher curbs on mortgage lending

worldtraveller

The Bank of England has warned that obtaining a mortgage is about to become even more difficult.

After tightening their criteria during the credit crisis, banks are becoming even stricter about lending.

Tougher rules because of fears that higher unemployment will result in more home owners defaulting on loans.

It will make it even harder for first-time buyers to get on to the property ladder, while those who need to renew their mortgages are likely to be offered less attractive deals.

Thousands of people could be refused a mortgage or be required to find even larger deposits than previously. It will also underline fears that Britain's household budgets will be squeezed further, increasing the chances of a "double dip" recession.

The Bank of England warned yesterday in its Credit Conditions Survey report that lenders had "tightened credit scoring criteria" over the past six months, and expect to tighten them even further during the next three months. It said lenders had told them they were adopting a more "cautious approach".

Melanie Bien, of Private Finance, an independent mortgage broker, said: "Recently, rates have improved, making mortgage repayments more affordable. But the tougher criteria will mean that people won't be able to get a mortgage at all, or will only be offered higher rates when they remortgage. It is going to get really tough for borrowers."

Telegraph.co.uk

AD9898_2

I see weird contradictions in media reports all the time, everyone seems in a agreement that the financial crisis has been to the detriment of the UK economy, it was caused by very poor lending by the banks to very poor borrowers.

Yet when the banks wish to tighten criteria, there is uproar. It can't be refuted that this kind of lending and borrowing caused the house price bubble, and it's this very bubble that has played a major part in ruining the economy and many peoples lives.

It seems some want there cake and eat it, they want no future financial crisis at the same time as a normal housing market with sky high prices

It seems obvious to me that you can't have both, it's either one or the other.

RenovationMan

We'll see if any of these plans actually make it off the drawing board. It's all politics at the moment which means we'll hear a lot of noise and very little action. I think the more extreme lending models such as 100% - 120% mortgages will be legislated against, but 90% mortgages have been available for decades and remain available for decades to come.

A move towards affordabilty rather than a pure mathematical calculation based on salary (i.e. 3.5 x salary) would be much safer for all concerned. There is no logic in allowing someone with huge debts, a spendthrift lifestyle (lot of monthly outgoings on mobile phone contracts, Sky tv contracts, car finance) to have a 3.5 x salary mortgage even though he will struggle to meet the monthy repayments while preventing someone who is completely debt free and has a frugal lifestyle from having 4 x salary who would easily meet the monthly repayments.

Kenny4315

My Financial Advisor is so fed up with the restrictions on mortgages, he is thinking of stopping giving mortgage advice, as more often than not a deal falls flat on a mere ridiculous technicality, thus wasting everyones time and money. Pen pushing blotter jotters need to start thinking rather than checking boxes. If this had been the case in the first place we'd have avoid the credit crunch in the first place. As RennovationMan correctly points out, gross salary X3.5 is a ridiculous measure of affordability, especially in the higher tax brackets when 40% + is removed before you even see it, or for someone who splashes the cash and is always on the edge no matter how much earnings are.

mbga9pgf

RM, they wont need to legislate. The banks are about as pessemistic as they can get and ultimately, the BOE and government can stamp their feet all they want, they cant force a bank to lend.

CLAPTON

RenovationMan wrote: »

We'll see if any of these plans actually make it off the drawing board. It's all politics at the moment which means we'll hear a lot of noise and very little action. I think the more extreme lending models such as 100% - 120% mortgages will be legislated against, but 90% mortgages have been available for decades and remain available for decades to come.

A move towards affordabilty rather than a pure mathematical calculation based on salary (i.e. 3.5 x salary) would be much safer for all concerned. There is no logic in allowing someone with huge debts, a spendthrift lifestyle (lot of monthly outgoings on mobile phone contracts, Sky tv contracts, car finance) to have a 3.5 x salary mortgage even though he will struggle to meet the monthy repayments while preventing someone who is completely debt free and has a frugal lifestyle from having 4 x salary who would easily meet the monthly repayments.

I thought it was the move away from simple formulae like 3.5 x salary and onto 'affordability' (which is easier to lie about) that was a significant cause of the bubble

DervProf

AD9898 wrote: »

It seems some want there cake and eat it, they want no future financial crisis at the same time as a normal housing market with sky high prices

It seems obvious to me that you can't have both, it's either one or the other.

True.

Some say house prices are too high and will fall (people such as myself). Others (Hamish etc) predict that this will not happen, or shouldn`t happen, or would be a bad thing if it did happen etc.

Whatever.

The thing is, we now hear calls for the FSA to not introduce new lending rules. We hear cries for the banks to pass on the very low base rate to borrowers, and for deposit requirements to be reduced. Let`s imagine that all those "good" things are granted. What would happen ?

I suggest that the property market would get moving again (good), and prices would start to rise again (good?). So, we end up with 5% or less deposits, 1.5% SVRs and property prices "adjusting" to those conditions. Then what ? If property is to carry on going up in price, it would require wage inflation, or further loosening of lending criteria (125% mortgage anyone ?). Seems to me that would be quite a dangerous situation. It is obvious to me how much the UK economy now relies on the property market. Boost the market further, and the UK economy is likely to become even more reliant upon it. And when the UK economy is heavily reliant on property that has further increased in price, based on very low borrowing costs and high LTVs, where do we go from there ?

The way to kick a habit is not to feed it. I prefer to take a little pain for longer term gain, rather than "ooow, it`s looking a bit nasty, better make a quick fix".

mbga9pgf

I would say at a time when rates are so low, they need to introduce a temporary cap to ensure people dont overextend. IRs are low to recap banks, not to give us all cheaper mortgages (good luck with that one).

Generali

RenovationMan wrote: »

We'll see if any of these plans actually make it off the drawing board. It's all politics at the moment which means we'll hear a lot of noise and very little action. I think the more extreme lending models such as 100% - 120% mortgages will be legislated against, but 90% mortgages have been available for decades and remain available for decades to come.

A move towards affordabilty rather than a pure mathematical calculation based on salary (i.e. 3.5 x salary) would be much safer for all concerned. There is no logic in allowing someone with huge debts, a spendthrift lifestyle (lot of monthly outgoings on mobile phone contracts, Sky tv contracts, car finance) to have a 3.5 x salary mortgage even though he will struggle to meet the monthy repayments while preventing someone who is completely debt free and has a frugal lifestyle from having 4 x salary who would easily meet the monthly repayments.

Over here any debt you have removes $ for $ from your ability to borrow. Included in that is Foxtel (Sky) and any other commitments you have such as mobile phone, utilities etc. Also, the total amount of you credit limit on credit cards comes off the amount you can borrow as people have a nasty habit of moving into a new place and maxing out the cards on new furniture, renos etc. Also, each child under 16 knocks (from memory) $4,000 off your disposable income.

They don't make you repay the debt at 65 however, you just have to have a 'reasonable plan' in place to repay the debt. That can include a sale of the property, especially on BTL.

RenovationMan

CLAPTON wrote: »

I thought it was the move away from simple formulae like 3.5 x salary and onto 'affordability' (which is easier to lie about) that was a significant cause of the bubble

The problem was that they didnt make enough of an effort to check the income and outgoings of people before lending them money. The concept of using affordability is sound, it was just put into practice badly by certain banks. Using a set calculation, such as 3.5x salary, is simply allowing banks to be lazy and not check people's finances other than a cursory glance at 3 payslips.

ILW

Sadly the BoE do not seem capable of thing more than 5 minutes into the future. Hence the mess we are in. Their latest wheeze is that savers should blow their savings to get things moving and sod what happens in 5 years time.