Lloyds Leads In Limiting Loans Above £500,000 By Capping Income Multiples
21st May 2014
The big news story is the move by Lloyds Banking Group to restrict lending over £500,000 by applying a maximum 4 times income cap above that level. This applies to all their brands including Lloyds Bank, Halifax, Bank of Scotland and Scottish Widows.
The move comes off the back of a set of warnings from the Bank of England and other institutions over worrying levels of house price growth in London.
Whilst I understand the reasons behind such a move, certainly a return to income multiples is a clear methodology, it is nonetheless extraordinary especially as the Mortgage Market Review, (MMR) has barely taken effect and begun to filter through. Also, some agents have said there are already signs that buyers are beginning to refuse to pay higher asking prices and prices may be starting to level out.
Ed Mead of central London estate agent Douglas & Gordon stated that ”Buyers, who after all make the market, have sort of called time on some prices being asked. They’re not paying what’s being asked,” he said.
“Part of the reason for price rises is lack of stock which created something of a frenzy among agents looking for listings and pushing prices beyond what buyers will pay. When this happens there’s usually a three month hiatus before sellers realise what’s happening and adjust and that’s what’s happening now.”
Then we have the whole question around the new MMR provisions. The point of the MMR is for lenders to accurately assess affordability not just now, but also under stress tested conditions in the future. If underwriters correctly ascertain a loan is affordable now and in the future at 5 times income for certain borrowers, why then should they be restricted further?
This also does nothing to curb the numbers of cash and overseas buyers, as well as certain HNW borrowers who, given the fact that they can borrow £500,000 in the first place, will have a big cash deposit behind them already and potentially the ability to fund a higher cash element.
In essence therefore, it affects people least likely to get in trouble, who are more likely to be able to afford a rate increase, who are most likely to reduce the loan early with bonuses or can afford the extra cash deposit anyway.
It is an attempt to introduce a regionalist policy in all but name, though London is not the only place where there are high value properties and other areas of the UK will also be affected. There is also an argument that it could actually stop people moving as well as they may not be able to borrow the amounts needed for their new home at a higher level which in the short-term at least could exacerbate stock shortages.
In reality, most lenders have a similar policy across the board, with most capping off at a maximum of 5 times income. The big question is whether other lenders will follow suit and reduce this further as often where Lloyds leads others soon follow.
What all of this does do, however, is create another talking point, which when added to the rhetoric coming from the Bank of England in recent days, changes people’s perceptions that prices will be allowed to keep rising – that in itself may be enough to stop the regulators from doing anything further.
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Andrew Montlake, Director and Spokesperson for Coreco, gives his honest and forthright views on the mortgage market, economy and all things property related. Monty was voted "Mortgage Personality of the year 2008", "Best Press Spokesperson" in 2011 and is the current holder of the British Mortgage Awards “Best Marketeer” title. Expect expert analysis, delivered in a down to earth style with a side helping of exuberance.