Monday, Mar 16, 2009
Are you 'dismayed' at not being allowed to borrow 6x salary?
Telegraph: The FSA mortgage cap: how it affects you
Those looking to move home or take their first step on the housing ladder, may be dismayed to read reports suggesting that they will only be able to borrow up to three times their annual salaries, under strict new banking guidelines.
As well as imposing a cap on the maximum amount banks can loan, the new rules are also expected to ban 100pc mortgage will be banned.
Ray Boulger of the mortgage brokers John Charcol added: "It seems inevitable that this will have a negative impact on house prices particularly as the average house price is more than three time the average salary." According to the Halifax the average house price is £160,327, with the average income being £26,000. The following question and answers provide more detailed information:
59 Comments
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1. alan said...
Ray Boulger of the mortgage brokers John Charcol added: "It seems inevitable that this will have a negative impact on house prices particularly as the average house price is more than three time the average salary." According to the Halifax the average house price is £160,327, with the average income being £26,000.
2. last_days_of_disco said...
Well, now we know where house prices are going.
3*26000 = 78000
My oh my, how the mighty have fallen.
3. will said...
Great news for all of us here on HPC. Sense might prevail. I wonder how homeowners who currently borrow more than 3 X their salaries will fare when their fixed rate mortagaes expire and they need to re-mortgage under the new rules?
4. last_days_of_disco said...
78000 feels about right. Think about how much better your life will be if you only shell out that for the place you live in. It just takes the maddening pressure off.
5. paul said...
Looks like the Bank of England aren't the only people going for the nuclear option.
I saw Miles Shipside from WrongMove on the news putting on a brave face but this really is the death knell for overpriced housing.
6. phdinbubbles said...
3*26000 = 78000 (plus deposit) for a FTB on average salary type house, so around 100k for yer average house. That's not telling me anything new. However, this news will get the message out to the masses.
7. Johnny5thumbs said...
Oh well - it's back to the old game of asking your boss to 'sign' you up for a higher wage on the mortgage application form to help you get your mortgage. Makes me feel almost nostalgic !
8. hpwatcher said...
It always used to be x3 salary....it was the 'effing labour government that changed it.
So it has taken all this time for these idiots to see what a terrible mistake they have made.....bloody politicians!!! &*^%$##@
9. mark wadsworth said...
I don't think that this will disadvantage FTBs at all - broadly speaking one FTB is fighting with another FTB for the same property.
By analogy, if you give each one a pair of boxing gloves (a 3x mortgage), the loser ends up with a black eye. If you give each one a knife (a 4x mortgage), one ends up in hospital. Give them guns, one ends up dead (a 5x mortgage). Give them nuclear weapons ...(etc).
As we have a top heavy population pyramid, for the next decade or three, there will be more old folk dying than young couples buying.
As was pointed out on the earlier thread, superficially this might benefit BTLers. But there should be a similar restriction for BTLers (like they had until about 2003) saying that max LTV is 80% and max loan is calculated as gross rents less 40% flat deduction for voids and expenses, discounted up at 8%.
---------------
Obviously, it would be nice if this went together with liberalising planning laws and replacing as many taxes as possible with Land Value Tax (as well as reducing taxes overall) but hey, one step at a time ...
10. crunchy said...
This a good news but what is happening to self cert and how does this effect BTL?
11. japanese uncle said...
The lesson here is:
Nothing could be more dangerous than 'don't miss the buss' mindset. In 1940, mesmerized by Hitler's stunning success in his earlier campaign in Europe, the Japanese army brass were pushing for the alliance with Germany and Italy, saying 'Don't miss the buss'
12. Dave said...
Makes sense to me. Generally you'd move in with someone
(2x26000)x3=£156,000 plus your deposit = approx. the average house price!
13. bidin'matime said...
But they (the press) still dont get it, do they - they read this as bad news for FTB's, when as Mark W says, it's all good news!
14. mdmick said...
Not sure why this is not on the BBC news tonight.
It is news, isn't it?
More relevant than a robot that they say can not do anything much useful yet.
I think I am missing something here. It's bizarre.
15. denzil said...
I do find it staggering why anyone would believe that the government would accept a policy/recommendation that would wipe at least 50% off the value of housing stock in the UK. Do you really believe the government (with an election approaching) would plunge hundred of thousands of families into negative equity. Get real!
Anyway, this will not solve all of the problem because the landlord will always be marginally ahead of the capped 3 X buyer, which will mean the FTB will never return to the ratios of days gone by.
Does anybody really believe that Labour will fall on its sword with an election approaching?
16. crunchy said...
12. mdmick- Nobody likes to administer or consume cod liver oil. Leave it for the radio and papers first.
This news is the second bit of sanity that has come out of this mess so far, the first being banks closing there doors to reckless lending.
More of the same please!
17. mdmick said...
Perhaps, Denzil, it is damage limitation.
Maybe someone has said, "Look! Banks can only lend 3 times salary now if they are going to fulfil their promise to the govt to do some lending."
So, it is being spun as a strategy decision rather than as an economic limit which the banking world finds itself in.
But, I agree that the story seems untrue.
18. str 2007 said...
mdmick
I was surprised this didn't show up on the news.
Looking forward to seeing the full details of this. I will personally suffer as my earnings vary alot. But overall it will bring a dose of sanity.
I hope we see significant BTL restrictions or tax changes to take away their advantage.
I see flats etc coming down to (£25k x 3) + £10k deposit = £85k for a 1 bed. (£25k x 4) + £15k deposit = £115k for a 2 bed (joint applicant). And an average 3 bed semi (3 x £30k) + (1 x 20k) + £30k equity = £140k.
A 4 bed detatched (3 x 40k) + (1 x £30k) + £80k equity = £ 230k
Potentially I think the 4 bed detatched houses have the furthest to fall as alot in the South East are at least £300k but I suspect average South East is in the region of £400k and I see this figure moving back to about £250k or 2001 levels now.
Providing BTL's get restricted aswell.
Please not above figures are my estimates (I haven't based them on current land registry figures for house types).
19. flashman said...
This is just posturing by the govt/fsa. The banks aren't giving out mortgages of more than 3X salary anyway. They realise they are powerless to change this or to stop the decline in house prices,so they have decided to pose as stern regulators. They want to be seen throwing rotten tomatos at the banks in the hope that people forget their pivotal involvement in the fiasco
20. bellwether said...
This has attracted a lot of posts but it's clearly bullsh!t at some level. The proposition if enforced would kill house prices whereas this governments more or less sole objective is to ensure that house prices do not crash as most credit money and consumer spending is linked to these values
21. robh said...
Was this what the 50p per unit of alcohol news was all about? Attempt at a smokescreen
22. str 2007 said...
denzil, mdmick
I have read this article as 'The FSA will announce new rules this week'.
This as far as I can see is not a suggestion as per the 50p per unit alchohol proposal.
I suggest that the labour government have to a degree conceaded defeat and rather neatly handed the process to the FSA.
Yes house prices will fall (I think they were anyway), but this makes it look like the government have done their job and made those responsible act correctly.
I think (I would) it puts them in rather a good light.
Don't forget the sheeple just think house prices go up, they don't understand that it's LTV's and lending ratios that make them go up.
I think it's the same in reverse. The government need to be seen to have acted correctly. Most home owners would agree that borrowing more than 3 x is getting reckless. I'm not sure they'll make the connection directly with max 3x lending bringing down house prices.
I think the general public will associate the general financial problems and recession with the fall in house prices.
And to be fair if FTB's can save £10-15k they should now be able to afford a place of their own and that is a good thing. Don't forget most retirees have children in the process of being FTB's or moving up the ladder.
I think this sanity will in actual fact be a vote winner for the government.
23. uncle tom said...
Flashman,
Agreed, but it would spell out to vendors just how out of reality their asking prices are.
There is a lot to be gained from having the HPC over and done with sooner rather than later..
24. bellwether said...
STR you're not actually buying this!?
25. robh said...
The linked article (Five ways to boost the amount you can borrow for your mortgage) suggests
"It is possible to use bridging loans, credit cards and personal loans to make up any shortfall in your mortgage lending"
Okay, so that's 3 x mortgage and the other £50k on Amex
26. str 2007 said...
bellwether
Not sure this is bull***t. I think it needed to be said. With a big deposit HSBC will lend 3.5 times joint, they have now removed interest only without a repayment vehicle in place. But IMO 3.5 times joint is still too much to be lending.
By actually putting this restriction in place it lets everyone know where they are and I think puts a firm line under the situation.
I think it will give everyone a boost as we all now know where we are and can move on instead of speculating about what will or won't happen, or trying desperately to get a bigger and bigger mortgage just to compete.
Hope this gets followed up properly this week with the announcement of a full set of fair rules that everyone must stick to.
27. str 2007 said...
cross post
bellwether @ 8.54pm
If they announce something properly within a week then yes I am buying it. (the news not a house).
They either will or won't announce proper plans and according to the article they say this week.
How do you read it ?
28. denzil said...
str 2007 said:
"Yes house prices will fall (I think they were anyway), but this makes it look like the government have done their job and made those responsible act correctly. I think (I would) it puts them in rather a good light."
I'm afraid I 100% disagree that it puts the govt in a good light. A good light possibly from a FTB perspective maybe or a better light from a STR but overall this is little more than posturing by the FSA. Too little too late. I expect this story to be dead in the water within five days. "Forcing a restriction to 3 X is the equivalent of telling every homeowner in the UK that the Govt will sanction a recommendation that will wipe around another 50% from the current valuation of their home.
I'm terrible with dates so on hearing this story I checked it was not April 1st.
I'll happily accept a bet that this will never be approved. Again, this is muscle flexing and posturing aimed from the FSA at the Banks.
29. flashman said...
I think it might also have something to do with the G20 meetings. GB's main objective for these meetings is to be seen as leading the way in creating world wide banking regulation (pure electioneering). This bizarre and disingenuous announcement is probably his attempt at showing the world that he taking the first initiative.
30. Ironman said...
Loving it:) !!!!!!!!!!!!!
31. bellwether said...
STR 2007 it is expressly the exact opposite of GB inflating his way out of this, it would be liquidation, it would kill our economy whose main sustanance for the past decade has been the sickly pap of house price inflation.
32. robh said...
Quite right @F
It takes some talent to stand there at the podium, and bang your fist, exclaiming the need for the world to follow your lead of 'regulation'
Hail our leader!
33. little professor said...
Bellweather and denzil have it right, methinks. No way the government would allow this to pass and collapse house prices even further.
34. alan said...
@ Bellwether, I also think the fortunes of Nu Labour are intricately linked with (high) house prices.
Anything which will cut prices by 15% will be avoided somehow. I think some "clarification" will be issued soon. Don't forget RBS were encouraged to allow £1.7bn for mortgages at around 3.4%. This is surely trying to put a floor (of sorts) under house prices. IRs have never been so low.
I can't see anything formal being introduced.
35. flashman said...
little professor, bellwether, denzil
The jig is up. The govt know that they are powerless to achieve a re-inflation of the housing bubble so they are changing course. Above all they want to be re-elected and they will adopt any posture (no matter how counterintuitive) that they perceive will keep them in the game
36. str 2007 said...
little professor, bellwether, denzil
The article says this will be announced - not - the FSA have some suggestions for the government to peruse.
I have frankly been surprised at the lengths the government have gone to to prop things up, I think we all are.
I believe the electorate will see the government making the FSA/Lenders act responsibly.
Yes this will suit FTB's, STR's. But it will also suit most retirees in the respect they won't have to fork out deposits for their kids to get houses.
Sensible lending levels will also allow interest rates to go back up which will suit retirees.
Ultimately more potential voters will gain from these measures than will loose and providing it's sold correctly to the electorate................
In fact I wonder if the stories a few days ago of 55% falls were put out as a softener for this news.
I said along time ago (12-18 months) that the government needed to find the bottom of the market quickly then use its ammunition.
IMO thet should have done this 18 months ago and then reduced interest rates. If they'd done it that way round things would be looking pretty rosy now (well maybe not rosy but better than they are now).
They've used most of their ammunition (I think) now they need to find a stable bottom quickly.
3 x earnings as a set rule will find the bottom quickly for them.
37. Aberdeen2 said...
As stated already no mention of this on news channels (tv), bit odd given it is pretty big news regarding what this could do to house prices and the benefits it could have on the economy with folks having the confidence to buy again....mabey 2moro if not I guess its just another hotwind story that will blow away.
38. mark wadsworth said...
@ more or less everybody.
My gut feeling is that this is just posturing (Nulab have spent the last year or two desperately trying to reflate the bubble, so it's one heck of a change of tack) - but maybe, just maybe, Nulab have twigged that if they get the crash over with quick enough (with this rule in place it wouldn't take more than three months), they then have nearly a year to shout 'green shoots' before the next election and possibly pull it off (like Major in 1992).
It's exactly what I'd do in their position.
39. str 2007 said...
bellwether @ 28
Yes it is the opposite of sustaining our economy on ever rising house prices and equity withdrawel, but that wasn't sustainable anyway. It had to be changed.
I guess they've realised this is as good a time as any to change it.
40. Dbc Reed said...
Some of these reports talk about banks lending UP TO 3xtimes salary.Given that the banks have done nothing to re-start the mortgage market,despite the Guv throwing cheap credit at them, it is conceivable that some of the banks will see these" restrictive" ratios as more than they are prepared to lend.Fingers well and truly burnt.
41. mander said...
Padon me denzil,
Would the Gov rather have a few families in negative equity or a broken country? Some probably hope that somehow things will return to 2007. It is painful for a lot people out there but we need to move forward.
42. Kev-all-in said...
IMHO this is a complete load of spin and BS.
As per above comments, if this is a serious 'regulation' - in effect a new 'law' it would have been (or made to look as if) proposed by the government not a toothless discredited shambolic failed organisation like the FSA - as if the govt would let them introduce something like this unilaterally.
The banks won't be lending at much more than 3x anyway so its a completly pointless statement.
Rather strange that a proposal of this magnatude is not reported by the 'mainstream' media, ie nothing on the bbc or c4 news. I agree that the obviously ridiculous alcohol price limits is a complete smoke screen so the govt look 'good' by standing up for normal people etc etc.
This would have been leaked and spun like mad if there was anything in it.
Kev
43. growler said...
I also see that if the FSA advises a certain level and a lender lends more than this, the onus (in event of stress) will be on the lender to prove that over-lending was not negligent.
Maybe the Financially Supine Authority have woken up after all. Now lets hope they really wake up
44. Tenyearstogetmymoneyback said...
If they implement this it will represent a real piece of long term thinking by the FSA
I liked the second from last question in the article
Q: Surely with interest rates so low, I can afford to borrow more?
All the government and Bank of England finance people keep claiming that if inflation starts picking up they will have to raise rates promptly. By getting this rule in now they can fend off some of the flack if rates suddenly have to go back to 10%.
:- Duncan
p.s Can anyone really predict what rates will be in 25 years time.
Unless you can get a 25 year fixed rate mortgage then having a limit
on borrowing is sensible.
45. Stevo said...
This is realy good news,I agree with mander ,lets move on, people have lost on the share and stock market, also the baby boomers pensions are down, get over it, the positive outlook is house prices will drop a lot, then people will be able to afford new carpets, get the decorators in,patios, ect ect, this means more jobs,people can get there lives back instead of worrying about a pile of bricks
46. paul said...
Note that the BBC has written NOTHING on news.bbc.co.uk about the FSA decree ...
47. Mike said...
http://www.telegraph.co.uk/finance/personalfinance/5002083/Proposed-cap-on-mortgage-lending-by-FSA-is-suicidal-say-property-experts.html
Look like it is a proposal rather than new rules....
48. it_is_going_with_a_bang said...
This is no vote winner for nunulabour.
This will make house prices fall considerably more than they would otherwise have done. True to say that banks are not lending more than 3x etc but right now they can change their minds whenever they please and some will do exactly that - especially at todays rates.
Limiting lending ratios to 3x effectively takes that decision away from them.
Lets not forget this economy is in a bad way and won't get much better until house prices stabilize. The time frame for that to happen is not anywhere near long enough to bring votes to nulabour by the next election date - it may infact time it at exactly the worst point.
Maybe 3x lending is just getting us prepared for higher rates in the years to come.....
49. fjcruiser said...
Actually the long term average income to house price is closer to 4 than 3 so another inaccuracy from the "wise" financial gurus. Of course before coming back to their long term average to income, house prices will have to be perhaps around 2 or 3 times income.
50. str 2007 said...
its going with a bang
''Lets not forget this economy is in a bad way and won't get much better until house prices stabilize''
Exactly and a set rule will get it down as quickly as is possible IMO, it may still under shoot but I think less likely to as people will 'know' how much they can borrow and that's it.
Likewise the agents will have a weak patch for a few months, but at least it will send a clear message to vendors that their asking prices will have to be realistic.
Re@ timeframe, they should have done this along time ago but better late than never.
Paul
Very true and I'm surprised nothing on the beeb yet.
Is it feasible they've fed via the Telegraph only at this stage, knowing we'd pick it up here and then guage our reaction as to the outcome of implementation.
51. inbreda said...
my take - this article is printed in a tory paper. The labour government mouthpiece propoganda machine (BBC) hasn't uttered a word of it. So this story is not something the government want released. Possibly it is the FSA trying to justify its own existence by trying to do the job it should have done a decade ago, in the faint hope that they will be able to prove they actually do something and avoid being fired down the road. So I think it is a unilateral decision by the FSA, but how exactly is Mr "Prudence" Brown going to argue against such sensible guidelines? He can't without looking like a one eyed hypocritical retard (not that he has a problem conveying that image on a daily basis).
I think we will see a unilateral announcement and some ashen faced politicians
52. denzil said...
mander said:
"Padon me denzil,
Would the Gov rather have a few families in negative equity or a broken country?"
That's an easy one. They would obviously a "few families" but that is not realistic because that's not the option; A) There is 100s of thousands who will be put into negative equity not "a few" and Britain is already broken.
Wiping 50% off the value of housing stock would break Nu Labours business model. Housing always provides growth to an economy through borrowing against the growth in house prices and also through the number of house moves that pump money into the retail sector through new carpets, electrical items, curtains etc. If house prices are "forced" to fall then it's clear how social mobility, and expenditure derived through the housing market will be impacted.
Who will the government be concerned about upsetting, the FTB who are in the age group that don't vote or the home owner who are potentially to be told that they are to be plunged into negative equity due to a house price bubble overseen and unmonitored by both the FSA and the Govt.
53. str 2007 said...
The Telegraph have 're-published' the article today and changed the wording. Apparently now these are suggestions being put forward by the FSA. Not concrete new rules to be announced this week as this article strongly suggests.
I've posted the new one as a fresh article.
I apologise to all above for being so gullible. Oh c*ck. There was short lived joy in my heart for a while.
54. Cynicalsoothsayer said...
I think this is just the shambles end-of-the-line past-it government unable to present a coherent policy. The ministerial departments are out of control and putting out disjointed contradictory press releases without collaboration and agreement. Gordo will no doubt be announcing more fake billions for mortgages and railing against the banks again soon, the complete opposite to this announcement.
55. house said...
I remember before the funny money era, anyone wanting to purchase property for investment, they had to have 50% deposit ie.Matched Funding. I can only assume this will be the rule for all the BTL's. Please note that in the last property crash of the 1990's I saw similar activity ie.there was increased demand after the prices started falling as people were under the impression that the prices were already low enough and will not go any further and started to purchase only to find that the prices kept on falling. This is my own personal experience. It took 3 years from the start of crash to bottom out and many in denial would not sell and the motivated sellers sold and managed to buy the property they wanted at a lower price eventhough they ended up in negative equity to begin with. Many builders who were not highly leveraged survived but had offered part exchange facilities which I understand is in fashion again.
Some commentators suggest that people with equity will call the bottom and start buying the properties and keep the FTB's off the market. But if the lenders require hard cash match funding then it would be difficult for the BTL's to purchase the properties in the falling market.
Any comments on this.
56. str 2007 said...
house
Agree if matched funding and you're quite right that the old BTL model relied on withdrawing equity from rising prices to fund the next purchase.
Having looked at some of the BTL deals available 5% and £5k arrangement fees based on at least 25% down but often 40% down, I personally can't see how it can expand at present.
I'm not clear how lenders are re-evaluating a BTLers position either. IE are they down valuing by 20% and then turning round and saying ''well you had 34% equity but now you only have 14% and our minimum requirement is 25% so you'll have to top up 9% for our mortgage product''.
57. letthemfall said...
house
Yes, I don't expect cash buyers to rush in again, or at least not to the extent that it will reverse the decline in prices. Things are a lot worse now than in the 90s and it is difficult to imagine any scenario in which credit becomes available enough to boost housing again. In fact that would only mean blowing up another bubble, with yet worse results in the near future.
58. Jonathh said...
The case for (2x26,000)x3=156000 isn't strictly the case. Both people wont be working for the full term of the mortgage hence the banks use to do 3.5x both incomes or 3x + 1.. particularity as the wifey is likely to stop working to 'spool up' the production line.
59. house said...
@54 and 55
Thank you for your comments. People on this site should be patient, property prices do not drop overnight.It took nearly 7 years to get to 2007 highs and it is going to take years before it bottoms out. I think it will never go back to the 1997 levels but I expect the Nationwide House Index to drop to around £125000 over the next 3 years and then it will stay at that level for many years. Therefore a first timer may be lucky to pick up a starter home in the region of say £105000 give or take £10000. To make this purchase the buyer would probably be earning £20000 ie. £20000 x 3.5 = £70000 + 30000 (Deposit) = £10000. This means that the market may not start moving for another 5 years staying at the bottom while the FTB will have to start saving by living with their parents etc. Obviously a joint borrower could borrow more. IMO FTB's property may bottom out at around £100000.
Be patient everyone and do not get upset by the comments made by various Vested Interest Groups. The market always finds it's level.
Also FSA can only advise the lenders but the if the advise is not taken then the lenders cannot ask to be bailed out if they get into trouble. This will be the case of I told you so but you did not listen and therefore we cannot help you. I am being naive on this. But in the real this is how it should work but time will tell.
Any opinions on this.