Unless you’re a mutant, three-legged anthropoid that has crawled out of the recently discovered Titan cave in the Peak District, you will be aware the UK housing market is suffering from affordability issues. This topic never seems to be far from the headlines and it has re-surfaced once again with the news that Abbey is to offer five times joint income multiples and HBOS, through the BM Solutions brand, will give selected borrowers 125 per cent loan-to-value (LTV) mortgages.
These moves have opened up old battle lines between offering people products which will help them to get onto the increasingly expensive property ladder, and the dangers of lending too much with people falling into negative equity.
Paul Fincham, senior media relations officer at Halifax, insists being able to repay loans drives the decision whether to lend:
“Affordability is the one overriding principle –we won’t lend to someone if they can’t afford it. Someone may see a product they are interested in but they might not meet the criteria so we won’t lend to them.”
Not a new debate
The debate over lending amounts is not a new one and other lenders have existing links in these markets. Advantage Home Loans will offer first-time buyers six times their income, while both Northern Rock and Coventry Building Society have already offered 95 per cent LTV mortgages with 30 per cent unsecured loans attached. However, the moves by Abbey and HBOS, as two of the country’s largest lenders, add a new dimension to the argument.
Mark Sismey-Durrant, chief executive at Heritable Bank, says: “Whatever the reasoning behind Abbey and HBOS’ moves, in both cases they are seemingly saying they can’t compete solely on price so they will have to stretch where others can’t follow on criteria. Commentators say where these lenders go, others will follow, and this could be a worrying development.”
Looking at the problems
The industry is now faced with two main questions: what impact will enhanced criteria have on the market, and, more importantly, how much further can lenders go?
One factor which could affect these questions is this month’s interest rate rise. The Bank of England’s move to 5 per cent Base Rate was widely predicted and Michael Coogan, director-general at the Council of Mortgage Lenders (CML), admitted at the time there were worries about consumers over-stretching:
“In recent months concern has been raised about lenders making credit too freely available and borrowers taking on more debt than they can sensibly manage. Today’s rate rise will undoubtedly fuel these fears.”
However, some commentators have stated the decision could put the brakes on the growth in the housing market. While a repeat of the crash of the late 1980s is not expected, anyone who has borrowed up to the hilt could find themselves in serious trouble if the market dips.
Sismey-Durrant warns: “In the worst case scenario, borrowers will really stretch to get onto the ladder then find they have bought right at the top of the property cycle. Then house prices drop and they end up owing more. Market conditions are different from the last big property boom as there are lower interest rates and unemployment is not shooting up but people are stretched and the levels of borrowing they are forced into are a concern.”
However, Fincham believes the rate rise could have a positive impact for first-time buyers. “Price growth has eased as forecasted but at a more moderate rate. We expect house price inflation to continue growing but the rate rise will help constrain it, which is good news for first-time buyers as it will allow them to catch up.”
A thorn in the market’s side
Most agree the key factor in the future direction of prices is the issue of supply and demand. With many pointing to a huge shortfall in the number of homes needed in the UK, it seems the upward momentum of prices will be sustained.
Therefore, affordability sets to remain a thorn in the side of consumers, whatever their position on the property ladder. With figures from HBOS and the CML showing average house prices now at 6.1 times average income, and rising, what more can lenders do to bridge the gap?
Brian Giles, communications director at Northern Rock, doesn’t expect a relax in criteria. “Affordability is a big part of our underwriting process and responsible lending is important. We consider client affordability carefully and anything we lend is linked to the credit score and maintaining a high quality book. We’re happy with our criteria.”
This view is echoed by Fincham. “It’s is a case of offering the right products and criteria but making sure we’re lending in a responsible way.”
Affordability is closely linked to responsibility as with the levels of debt now on the shoulders of consumers, there is so much at stake. Brokers and consumers must ensure mortgage repayments can be met, to ensure those who have battled furiously to get on to the property ladder don’t find themselves falling off.
