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Price pressure

FSA chairman Lord Turner has said in his review that lenders will be forced to hold more capital in the future to avoid a repeat of the banking crisis. Some experts predict that consumers will bear the cost of this move through higher mortgage rates.

Research from the National Institute of Economic and Social Research suggests that we could see higher borrowing rates for up to nine years.

However, the challenge is not affordability but availability of mortgage funding at the moment. Mortgage rates are already attractive but LTVs are severely restricting the number of consumers who can remortgage.

LTV restrictions will not ease until property prices stabilise. The fact that lenders will be forced by the FSA to hold more capital will encourage them to focus on lending to consumers with lower LTV requirements, which will not help alleviate the problem.

I am pleased to say that Turner’s review stopped short of capping loans at three times income which was widely predicted by the media although I do not believe that the idea has been completely scrapped.

If this happens, then surely it would be a backward step, given that lenders have moved to an affordability model which, on the whole, is fair and works well.

It could also have dire implications for the remortgage market, with borrowers needing more than three times income being at the mercy of their existing lender in terms of interest rate.

The current crisis is a result of whole-sale funding issues, not irresponsible retail lending, and such a measure could be a case of throwing the baby out with the bathwater.

I am comforted by the fact that if it were to happen, it would probably take a couple of years and a Conservative Government would surely scrap it anyway. But I still find it irritating that these ideas even get to see the light of day.

Having said that, I do think we are nearing or already at the bottom of the housing cycle so now seems like a sensible time for those with funding to buy. For consumers planning to move up the property ladder, buying at or near the bottom of the market makes great sense and they could make a real killing. The key question is how long it will take for the market to start to recover and there is so much conflicting evidence that it is anyone’s guess.

With house prices having fallen by around 17 per cent on average from their 2007 peak, consumers are definitely starting to think about moving, even though some experts are still predicting further falls.

The number of instructions has increased considerably this year and those with a realistic price expectancy know they are in a bargaining position. Furthermore, there have been some attractive new mortgage deals coming on to the market. The challenge is to stabilise house prices so LTVs can be reduced for the benefit of all borrowers.

Sally Laker is managing director of Mortgage Intelligence

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