Lenders must take care when implementing the new loan-to-income cap, industry commentators warn.
The Financial Policy Committee has recommended that no more than 15 per cent of mortgage lender’s new residential mortgages should be at loan-to-income ratios at or greater than 4.5.
The rule is set to come into force on 1 October and will apply to all mortgages completed on or after that date.
Mortgage Advice Bureau’s head of lending Brian Murphy says the new cap has been anticipated “well in advance” by several major lenders.
“Many have already introduced their own measures, meaning that the impact of loan-to-income restrictions will reach the high street far earlier than 1 October and begin to ration the finance that is available to some consumers.
“Individual measures are a clear sign that the mortgage industry is committed to treading carefully – lenders are keen not to delay any action while rising house prices continue to outstrip wage growth.
Beware “excessive caution”
Some lenders’ steps go beyond the recommendations, meaning more borrowers will feel the effects, Murphy says.
“Aspiring first time buyers and younger homeowners will be among the first who find their borrowing options and buying ambitions are limited, particularly in areas where house prices are rising the most.
“It is crucial that the pendulum doesn’t swing too far towards policies that overrule the careful assessments now in place under the Mortgage Market Review.
“Excessive caution could undo recent efforts to give first-time buyers a helping hand. Lenders should always be mindful of personal circumstances and look at the whole picture, including regional variations in house prices, before shutting the door on potential borrowers.”
Base mortgages on affordability
LEBC senior financial planner Brian Morrow warns that lenders should not be using income multiples based on gross income.
He says deductions for pensions and childcare as well as outgoings should still be taken into account when considering loans to ensure the client can truly afford the loan.
“While this approach will mean that both the applicants and lenders are not putting themselves at adverse risk, it will inevitably cause some people to have to delay their house purchase plans but in the long-term it will result in sound financial planning that ultimately will lead to a more stable financial situation for the client.”
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