Is Owning A Home Out Of My Reach?

Posted on: 05 May 2009 by Gareth Hargreaves

Is it true the Financial Services Authority (FSA) are considering cutting down the amount of money homeowners can borrow?


Owning a home is already out of my reach and if the FSA make it more difficult, surely it would be impossible for first time buyers?

The FSA have deferred a consultation paper on this subject until September. You are correct however.

What problem are they trying to fix? Is it that banks lend irresponsibly? Is it that the homeowner borrows irresponsibly, or is it that mortgage brokers assist irresponsibly? Maybe it’s a mixture of them all.

In any event, a broad-brush approach of not allowing high loan to value mortgages and simply restricting income multiples, would have been the equivalent of pushing a car with spaghetti.

We are already in an environment where demand has plummeted and supply is still increasing. This is on the backdrop of falling house prices and nearly one million empty properties.

To introduce a block on income multiples would only serve to reduce demand further, pushing prices lower and in turn taking more equity out of the market that is needed to fuel confidence and spending. Great move that would be!

The goal appears to be to focus on peculiar lending practises such as 125% loan to value mortgages seen with Bradford and Bingley and Northern Rock. Northern Rock interestingly were still offering 125% loan to value mortgages after they had received government assistance to stay in business. Amazing.

How can institutions such as this put homeowners in immediate negative equity especially when house prices were clearly over priced?

Our first column on the subject was in 2003 and was repeated time and again pointing out the basic economics of house prices and what drives them. Whilst some dreamt up name of ‘credit crunch’ is getting the blame for the current situation, it is just basic common sense economics that is returning property to a realistic price.

Yet with that clear backdrop the banks continued to lend irresponsibly even offering income multiples up to five times earnings!

The obvious answer is to close all risks. Ensure banks a have a robust application process in place to monitor a borrower’s financial situation appropriately. If they don’t follow this process, they shouldn’t be allowed to repossess if the bad debtor they loaned money to turns out to be a bad debtor. That would be a sure fire deterrent for them.

Perhaps the biggest issue is that of advice. The ‘would be’ homeowner today can go to many places to arrange a mortgage. They could go and see the bank direct, straight to the internet, to a mortgage broker who isn’t independent or a mortgage broker who is independent.

The concern however is that all of these institutions might simply arrange the loan to receive their commission.

My view is that everyone should seek advice first and that advice should be paid for.

Only after receiving that advice might you want to proceed with a mortgage or house purchase, but how likely are you to receive that independent advice where the person in front of you giving you so called advice is only compensated if you do the mortgage?

I know many countries have formal restrictions on the size of mortgage loans such as Hong Kong, the Netherlands, Greece, Austria and Poland. But these are very different markets to the UK.

How can you say that a couple who don’t and wont have children, have no other loans, and have a fixed rate mortgage for 25 years, should have the same income multiple as a couple with three children on a standard variable rate? How daft would that be?

Clearly a one-size fits all approach will only serve to force people to borrow from other areas, some of which may well be unfavourable and nobody wants that.

So we welcome the consultation in September but hope the government have really thought it through or we could see a disappearance of the first time buyer and plummeting house prices.

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