Three Times Your Income

[Bloo Loo]

Surely rather than basing amounts on gross yearly a better idea would be net monthly affordability?

For example max mortgage repayment = 35% of net income of loan requestor(s). The total loan amount is calculated based on this figure and whatever the prevailing interest rate is at the time.

this is the stupid affordability method thats killed the banking system.

[contractor]

this is the stupid affordability method thats killed the banking system.

maybe the method was right but the implementation of it was wrong. Isn't the difference between make or break dependent on wether the number is 50%, 35%, or 25%?

[kilroy]

Precisely and impliementing this plan will re-inforce the denial of what has happened so far and will have the effect of shifting the blame for everything directly onto Gordon.

The argument will be that things were a bit slow, the banks stopped lending so houses stopped selling - all we had to do was to wait a few months for the credit to start flowing again and houses would have started selling again. Then along comes good old Gordy in the midst of all this and totally f4cks up the forthcoming recovery by telling everyone that aren't allowed to borrow enough to pay us what our house is "worth"!

It's all Gordo's fualt and that's what everyone will believe.

Suicide, absolute suicide which is why it'll never come to pass.

maybe the FSA will see getting rid of Gordon as a good thing.....

[Bloo Loo]

maybe the method was right but the implementation of it was wrong. Isn't the difference between make or break dependent on wether the number is 50%, 35%, or 25%?

no, what happens if the affordability cant be met with a normal repayment mortgage,they get the parents to help with the deposit, then they sell you an IO, and if they cant sell you that they offer to Lie, and if they cant sell you that, you buy with a friend...and so on.

[abharrisson]

this is the stupid affordability method thats killed the banking system.

I suspect you'll find that statement difficult to support.... affordability is not wrong (surely thats why people think 3 times earning might be better than 6 times earnings as a system).... is what you level you strike it at and what you include that counts.......... implemented correctly affordability is a far more equitable and sensible system than multiples in my view.

[mirage]

I suspect you'll find that statement difficult to support.... affordability is not wrong (surely thats why people think 3 times earning might be better than 6 times earnings as a system).... is what you level you strike it at and what you include that counts.......... implemented correctly affordability is a far more equitable and sensible system than multiples in my view.

How are you going to allow for changes in interest rates in your affordability calculations? If you just assume a range of possible rates and then calculate affordability you might as well just assume an income multiple.

[Si1]

maybe the FSA will see getting rid of Gordon as a good thing.....

the FSA will be disbanded by an incoming tory govt, mainly because they're empire-building vacuous self-promoting incompetent sh*ts

[Bloo Loo]

I suspect you'll find that statement difficult to support.... affordability is not wrong (surely thats why people think 3 times earning might be better than 6 times earnings as a system).... is what you level you strike it at and what you include that counts.......... implemented correctly affordability is a far more equitable and sensible system than multiples in my view.

easy to support, see my post above....affordability allows the banks to slip the loan to lower quality (for the borrower) types with ease.

Income multples looks at the total capital you can borrow, the slip downs to longer term, IO etc available when things go wrong. start at the bottom product and there is nowhere to go when things go wrong except to the possession hearing.

[Ulfar]

There is of course another argument for this to be put in place and that is interest rates can't go much lower and are looking far more likely to increase. If the banks carried on lending at stupid multiples then when interest rates rise the crash would accelerate to warp speed.

So do the government do it themselves under the guise of sensible lending practices or let it occur when interest rise occur and look totally out of control.

The people in negative equity are going to be either ignored by the government or some scheme will be put in place were you sell your house to the council and become a renter.

[tegan]

I'm highly sceptical this will ever happen too. Not that it's not a good thing, but it would have the effect of destroying the banks. For every 1k an individual house goes down how much do the banks lose? 10k? 100k? a million? If house prices were to go down to 3-4 x average earnings then that represents a 40-50% fall even on current levels.

The banks would be wiped out, and in turn so would the public finances since Gordon decided to tie us to the banks in a joint suicide pact.

Not going to happen. House prices will fall this much eventually but not with any help from the government/FSA.

[Old_Traveller]

I honestly hope this gets to be implemented. But that is precisely my main worry, how would such as scheme be practically implemented effectively?

1- Will it be an enforcing regulation/law or simply a guideline? if the latter then we are screwed and it will not come to pass.

2- If a regulation or law, how specific will it be? if vague and imprecise then we are screwed again. If it attempts to actually be practical it may very well take years until a final mortgage limit "formula" is reached that is agreed... by all decission makers at government, BoE and/or the FSA.

3- Even if a decent "formula" is created and implemented how will it be enforced? creativity to state wages, bonuses etc may have an easy way to inflate figures. What executive powers will finance authorities have in order to control and ensure?

[Bloo Loo]

I'm highly sceptical this will ever happen too. Not that it's not a good thing, but it would have the effect of destroying the banks. For every 1k an individual house goes down how much do the banks lose? 10k? 100k? a million? If house prices were to go down to 3-4 x average earnings then that represents a 40-50% fall even on current levels.

The banks would be wiped out, and in turn so would the public finances since Gordon decided to tie us to the banks in a joint suicide pact.

Not going to happen. House prices will fall this much eventually but not with any help from the government/FSA.

its being announced this week according to moneyweek

" Apparently potential homebuyers will be banned from borrowing more than three times their annual salary, under new rules to be announced this week. And they’ll have to stump up at least a 5% deposit.

The Telegraph reports that the tough new rules are part of a move by the Financial Services Authority (FSA) to change its regulation of the financial industry.

I’m not sure if anyone’s told the FSA, but I think the new rules might have come a little bit on the late side…"

[Timm]

I honestly hope this gets to be implemented. But that is precisely my main worry, how would such as scheme be practically implemented effectively?

(...)

Simples.

Bring in a govt backed mortgage guarantee scheme (as mooted already). Those mortgages that are no more than 3x income with at least a 5% (or 10%) deposit get a "stamp of approval" and can be sold as securities, thus opening the lending markets.

Of course, we should not limit "choice", so lending that does not get the stamp will not be outlawed, but those non compliant mortgages will be by specialist lenders, won't be able to access vast piles of cash through selling the debt on, and will therefore be hard to come by and at very high rates of interest. The specialist lenders will also be small enough to fail.

[Guest DissipatedYouthIsValuable]

If you need a mortgage, you can't afford it.

[Emy74]

circumstances my dear watson, circumstances.

the "rules" were rule of thumb.

the pain we saw in 2007 when rates were only at 5.5% was caused by lending over the guide.

if your argument was correct, there would have been no pain, no crash, no bailouts, no bank failures and so on.

Is there any evidence that the banking crisis was caused by 4X plus lending? Repo rates are not at the same rates as they were in the 90's. The banking crisis has been caused by poor investment banking and in NR and BB's case their model regarding how they funded mortgages. As far as I'm aware RBS and the Lloyds Group retail banking sides made a profit. We have always had boom and bust so where is the evidence to restricting lending to how it was before will solve anything.

[notthereyet]

I'm not sure if anyone's told the FSA, but I think the new rules might have come a little bit on the late side…"

It may be to late for the people who have bought in the last few years,but prices will have to come down to FTBers affordability if this is brought in and it would be the same for all borrowers so HPI would be limited in the future.

[Rinoa]

According to the CML, average FTB mortgage in 2007 was 3.2 x salary.

Now prices are 20% down from the 2007 peak, x 3 shouldn't be too onerous for most.

[Bloo Loo]

According to the CML, average FTB mortgage in 2007 was 3.2 x salary.

Now prices are 20% down from the 2007 peak, x 3 shouldn't be too onerous for most.

thats only because there were only 3 FTBs inthe whole of 2007!!!

[Bloo Loo]

Is there any evidence that the banking crisis was caused by 4X plus lending? Repo rates are not at the same rates as they were in the 90's. The banking crisis has been caused by poor investment banking and in NR and BB's case their model regarding how they funded mortgages. As far as I'm aware RBS and the Lloyds Group retail banking sides made a profit. We have always had boom and bust so where is the evidence to restricting lending to how it was before will solve anything.

im sorry, another one who cant see the blindingly obvious.. two words...SUB PRIME

[thecrashingisles]

But the denial cuts both ways. A lot of people don't believe that the reason their house price went up was because of crazy lending, so how can outlawing massive mortgages cause them to crash?

According to the CML, average FTB mortgage in 2007 was 3.2 x salary.

Now prices are 20% down from the 2007 peak, x 3 shouldn't be too onerous for most.

QED

[LiveAndLetBuy]

What about BTL mortgages?

If this happens then yes we'll get a bigger crash (which makes me doubt it will happen) but even if it did then the FTBs wouldn't be able to compete with the BTL brigade. Interest rates are still historically low for BTL mortgages so the predicted rental income would outweigh 3 x the salary of most FTBs.

[Emy74]

im sorry, another one who cant see the blindingly obvious.. two words...SUB PRIME

Is there any evidence to the banks in the UK that failed failed due to subprime lending? As I said before NW lending practises have allowed 4 times joint mortgages which include couples on the same wage and they are not in trouble and therefore where is the evidence that lending 4+ times is the cause of our problems?

In the US I suspect Liar loans, NINJA Loans. Subprime loans were a massive problem but where is the evidence that a standard prime couples on joint income of 50K borrowing 200k are huge risk and are likely to default on their mortgage.

Has any research been done to show default rates at different multiples and based on single or joint incomes? How have people arrived at the figure of 3 times being reasonable? Why not 3.5? why not 2.5?

[impatient_mug]

this is the stupid affordability method thats killed the banking system.

It may have been poorly implemented, but taking affordability into account does make sense. Lets make up a person who has the following essential monthly costs (these may be inaccurate, this is just for an example):

Council Tax - £90

Transport - £150

Food - £180

Utilities - £80

Base monthly costs of £500 before housing.

Now lets say Mr. Imaginary earns £20k. Monthly post tax takehome is £1300 a month - leftover income before housing costs is £800. 3.5x mortgage would be £70k or £451 per month at 6%. Leaves them £349 to live off - all entertainment, subscriptions etc, money to save, money for emergencies.... It fits in the multiple, but I wouldn't call it affordable. What if IRs hit 10%?

Another Mr. Imaginary earns £45k - £2,710 takehome leaving them £2,210 takehome. 3.5x mortgage is £157,000 or £1012 a month. They still have £1,198 to live off - more than many people's takehome. That mortgage is easily affordable even at 10%.

If done properly I think affordability is better than blanket inflexible multipliers that don't take the basic cost of living into account.

[Ash4781]

Good grief. Can someone run the numbers on the toxic dump insurance ?

What was it the banks take 10% of the hit, and tax payer 90%?

[Jim B.]

Obviously I would love this to happen, as it would make housing more affordable and be sensible for the future. Has Gordon got the guts to do the right thing though? Doubt it.

I think First Directs current tracker deal is a max of 3 times salary already, I think the Nationwide will give you 4 times but you need 25% deposit.

Someone argued above that the banks would hate this as the loans they already have would be against falling prices. Well as long as the people in those properties paid the mortgage the paper value of the house is immaterial. As is obvious, negative equity in itself is not a problem.

And I think the banks are going this way anyway, if you look at what they are offering in deals for a FTB now with less than a 25% deposit.