Mortgages |
|
Your Money > Mortgages Articles > Mortgage meltdown: What it means for you
|
|
By Richard Evans
The amount of money that you can borrow to buy a home may be restricted by law to just three times your income as the authorities try to prevent financial boom and bust in the future. What it means for you: First-time buyer, Second-time buyer, Remortgaging The City regulator, the Financial Services Authority, announced today that it would consider introducing much tighter rules on mortgages, such as maximum income multiples and minimum deposits. The results of its deliberations will be published in September. Many expect the FSA to ban banks from lending more than three times a borrower’s income and to outlaw 100 per cent mortgages, instead requiring a deposit of 10 per cent or possibly 15 per cent of the property value. But what impact would such rules have on your ability to buy the home you want in future, whether you are thinking of buying your first property or moving to a bigger one? And how would these restrictions affect people wanting to remortgage? We asked Richard Morea of London & Country, the mortgage broker, to estimate the consequences for three typical borrowers: a first-time buyer hoping to purchase a £150,000 flat, a couple wanting to upgrade from a flat to a three-bedroom house, and a family needing to find a new £200,000 mortgage on their £350,000 home. Let’s look at a single person or a couple on a total salary of £30,000. If they were looking to purchase a flat worth £150,000, then with four times their salary - which is reasonably achievable at present - they could currently borrow £120,000, Mr Morea said. This is 80 per cent of the property value - otherwise known as the "loan to value or LTV - and is the maximum LTV if you want a good choice of reasonably priced deals, he added. While lending is available to 90 per cent LTV, this would severely restrict the choice of lenders and the rates would be less competitive. "But if the multiple were capped at three times salary then borrowing is reduced to £90,000. This would leave the borrower needing a £60,000 deposit, which is out of the reach of most first-time buyers.” If you did somehow find the bigger deposit, however, you would benefit as the lower LTV of 60 per cent would give you access to mortgages charging lower interest rates. Next Mr Morea considered a buyer wanting to upgrade from a one-bed flat to a three-bedroom house. He assumed a household income of £50,000 and for simplicity ignored all costs associated with moving home. If the couple sold their flat for £120,000 and had a £70,000 mortgage, this gives them a £50,000 deposit on a £250,000 three-bedroom house, he said. This equates to an LTV of 80 per cent. Currently, their £50,000 income at a multiple of four times allows them to raise the £200,000 mortgage necessary to complete the purchase. "But if the 'three times salary’ cap were introduced, they can't make the move as their mortgage will be limited to £150,000 and their maximum purchase price (including the £50,000 deposit) will be £200,000,” Mr Morea said. The price of the property they wanted to buy would therefore have to fall by 20 per cent to bring it within reach. But even a drop of 20 per cent might not allow the move as it's reasonable to assume that their current property would also lose 20 per cent of its value, which would reduce their deposit by 52 per cent to just £26,000,” Mr Morea pointed out. This time we’ll look at a family with a household income of £60,000 looking for a new mortgage deal for an outstanding repayment mortgage of £200,000 on a property currently worth £350,000. Without a cap on income multiples, the borrowers could comfortably switch their mortgage as the income multiple is 3.33, well below the level of four typically available now. With an LTV of under 60 per cent they could switch to a cheap deal such as a two-year fixed rate of 2.89 per cent from HSBC. Assuming a repayment mortgage over 20 years, this would give them monthly repayments of £1,098, Mr Morea said.
But if a cap were introduced they would face the prospect of having to find £20,000 to reduce the mortgage to three times their income (£180,000). "Alternatively, they could stay with their existing lender and take whatever deal they were offered, such as the lender’s standard variable rate (SVR),” said Mr Morea. "While they could be lucky and find themselves with a lender whose SVR is low (Nationwide and Cheltenham & Gloucester will both be charging just 2.5 per cent from April, for example), many SVRs are more than twice this. For example, Chelsea Building Society’s is 5.79 per cent, Leeds Building Society charges 5.49 per cent and Newcastle Building Society’s SVR is 5.99 per cent.” Switching to an SVR of 5.5 per cent would mean the family’s repayments rising to £1,376 per month - £278 per month more than if they had been able to remortgage. Ray Boulger of John Charcol, another broker, said: "If mortgages are limited to three times income, many borrowers who have borrowed more than that but have a perfect credit rating would be denied the opportunity to remortgage or move house, and would therefore be at the mercy of whatever uncompetitive rate their current lender chose to offer them, in the knowledge that they were a totally captive customer.” How will this effect house prices? Mr Morea said it was impossible to say for certain what effect a cap on income multiples could have on house prices, but pointed out that a fall in the multiple from four to three represented a decline of 25 per cent. "Would house prices suffer a similar fall?” he asked. "If so, would this and the average 20 per cent decline already experienced be enough to make homeowners withdraw their property from the market? What sort of effect would a lack of supply have on the market? "With a combined 45 per cent drop in prices, how many more borrowers would be in negative equity, and unable to sell or remortgage because of it?” Jeremy Leaf, a spokesman for the Royal Institution of Chartered Surveyors, supported the introduction of restrictions. "This would be a return to mortgage rationing, but that would not be such a bad thing in some ways," he said. "We need to prevent a return to boom and bust and ensure that any recovery is sustainable with relevant supply in appropriate locations. "The market on its own cannot do this as it is unbalanced at the moment despite recent improvements in buyer interest; investors are still able to outbid first-time buyers in particular at the moment, preventing the market from developing normally over the longer term." Useful links: |
| ||||||||||||||||||||