The Financial Service Authority’s proposed cap on mortgage lending to restrict the amount home buyers could borrow, has alarmed property expert who warn that the move would be suicidal for the housing market. Proposals to limit how much building societies and banks and can lend home buyers restricting mortgages to just three and a half times a buyer s annual gross salary are one of the ideas published by the Financial Services Authority (FSA). And the Chairman of the FSA has also suggested a ban on 100 per cent mortgages.
This all comes on the back of the near collapse of the financial system. However, the FSA s suggestions have alarmed leading mortgage brokers and estate agents who warn that the housing market needs help, not restrictions.According to the Land Registry, since early 2007 the average house price has fallen by 25 per cent and the number of house sales has collapsed by almost 70 per cent.
The collapse of the housing market has been blamed on a shortage of funds in the mortgage market which has seen building societies and banks heavily restrict the supply of mortgage money to home buyers. Surely any move to further restrict mortgage lending would add insult to injury.
It would be suicidal and cause property prices to fall yet further. Lenders are already reluctant to lend and this would give them more excuses to erect yet more hurdles, preventing prospective homeowners getting access to finance. Last month, the chairman of the FSA called for a return to safety first banking. He said: The FSA wants to see the reinvention of the traditional savings and mortgage bank in the UK, making loans on careful and prudent terms.
It is understood that the prime Minister is very keen to see the FSA recommend a cap on mortgages, stopping anyone borrowing more than three and a half times their annual salary. This rule would stand except in the most exceptional of circumstances. No inkling has emerged as to what would qualify as the most exceptional of circumstances.
Before the housing boom years in the late 1980 s, it was normal for banks and building societies to offer mortgages equating to just 3 times annual salary. And at the same time they may well have insisted that home buyers save with them for two years before they would qualify for a mortgage. However, mortgage experts said a return to this style of lending was out of touch with current times and would greatly restrict consumer choice. A spokesperson from the Council of Mortgage Lenders (CML), said: We believe that anything that tends towards proscription is somewhat arbitrary.
And a spokesperson for mortgage brokers, said: Yes, we have had 3 and a half times mortgages before. But last time that happened interest rates were in double digits so low multiples were appropriate to ensure mortgages were affordable. Anything that restricts consumer choice is certainly not what we need right now, especially for first time buyers. Even as the market is at this time, first time buyers are not well served by the mortgage market.
According to the CML, banks have already restricted their lending and the average mortgage taken out by a first time buyer is already at just three times their income. If the FSA insists in restricting mortgages to three and a half times salary, the currently subdued housing market will only get worse. And prices will have to come down even further for first time buyers to be able to afford a decent house.
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