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Are loan-to-income caps a sign of things to come?

Money Marketing assesses the potential impact of the recent moves by Lloyds and RBS

The recent moves to cap loan-to-income ratios by Lloyds and Royal Bank of Scotland could be a sign of things to come from the Bank of England in their efforts to cool the housing market, according to mortgage experts.

In May, Lloyds Banking Group updated its policy on larger mortgages and introduced an income multiple of four times income where customers are looking to borrow more than £500,000.

Last week, Royal Bank of Scotland followed suit but also introduced a maximum loan term of 30 years where customers borrow more than £500,000. Both firms said the move was intended to address price inflation in London where, according to the Office for National Statistics, prices have risen by 17 per cent in the last year. ONS figures published last week show the average house price in London is now 5.3 times the average income of new mortgage holders in Q1, up from 3.5 times in the last three months of 2007.

It is worth noting that both banks that have moved to cap LTIs are banks in which the Government has a stake.

John Charcol senior technical manager Ray Boulger says: “Capping LTIs was clearly something that was going to attract media coverage and they could have just done it by amending the credit score needed for a loan. The fact it is the two state-owned banks that have done this, and the fact it was done publicly does suggest political or regulatory involvement.”

There have been a string of pronouncements from senior Bank figures of late warning on the housing market.

Bank or England governor Mark Carney said last month the housing market is the “biggest risk” to the UK’s financial stability while deputy governor for financial stability Jon Cunliffe added it would be “dangerous to ignore the momentum” of rising property prices.

The comments are raising expectations of a policy announcement to tackle the housing market from the Financial Policy Committee when it meets later this month.  

ING senior economist James Knightly says the route taken by Lloyds and RBS is a hint at what the FPC could do.

He adds: “These are the sorts of approaches we will see the Bank take. People have taken out these ultra-long mortgages to get past affordability criteria but the Bank is also worried about the levels of debt out there. It will also set out a direction of travel for the future.”

Impact on London?

Figures from the Council of Mortgage Lenders show in Q1 around 8 per cent of mortgages in London and 2 per cent of those in the UK were worth over £500,000.

RBS says the cap will affect 2.6 per cent of its business. Boulger says Lloyds’ share of the top end of the market is similarly small and so the banks’ actions will have little effect on their own.

He says: “It will only have an impact if the whole market goes down the same route or the FPC decides to enforce LTI caps because that would leave people with no other option but to accept the caps. 

“If that happens, you would expect prices to be lower than they would otherwise be. Not to say prices will fall in the event of market LTIs, but rather rise less quickly.”

Research from Hamptons International claims £18bn was spent on cash only purchases in London in the year to March, accounting for 26 per cent of sales. Nationally that figure is around a third. 

There is a perception that rich foreigners are skewing the capital’s market but Knight Frank research highlighted by the Bank of England in its November financial stability report show this group accounts for just 3 per cent of cash sales in London.

Chadney Bulgin mortgage partner Jonathan Clark says the level of cash sales makes a cap pointless.

He says: “We all know a lot of price inflation in London is down to cash buyers. Plus there are plenty of expensive homes outside London and it would affect mortgages for them too. LTI caps is too blunt a tool.”

GPS Economics director Gary Styles agrees. He argues such a measure could stop people getting mortgages they can afford.

He says: “It depends on how these caps are constructed with respect to other credit information. But simple rules can exclude some people from an opportunity they can quite easily afford, even under stress.”

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