Crazy lending v insane housing system

Originally written as a column for Inside Housing.

It sounds crazy and it is. New mortgages at up to seven times a person’s income look like a reminder of the excessively loose lending seen before the financial crisis and the collapse of Northern Rock.

At the end of a year in which house prices have risen at their fastest rate since 2006 and interest rates began to rise from record lows, and at the start of one in which household incomes face a squeeze, the timing of the new deal from online broker Habito looks, shall we say, interesting.

Take that seven times income and add five times a partner’s salary and a couple each earning £25,000 could borrow £300,000 to buy a £330,000 home, well above the Nationwide’s new UK average of £255,000. Take out the loan for 40 years rather than the traditional 25 and they can reduce their monthly payments too.

It’s just one deal and it has probably already generated more than enough publicity to be worth it for the company involved.

However, seen in a broader context it can only add to the pressure on house prices and further enrich existing property owners even as it improves market access for those who want to buy.

Read the small print and you’ll find that this deal is restricted to secure professions in the public and private sector unless you earn more than £75,000 and that the fixed rates for a 90 per cent mortgage are 4.64 per cent for a 25-year loan and 5.6 per cent for a 40-year loan.

Add a product fee of £1,995 and consider that if you do take out a 40-year loan to reduce your monthly repayments you will still have more than half of it to repay after 25 years and several deep breaths will be needed before taking the plunge.

And yet… what’s the alternative? Yes, this is an extreme example but if you choose not to stretch yourself to the limit in your monthly mortgage repayments then you will probably be stuck paying more than that in rent to a landlord.

Not only  that but you will probably be paying your landlord’s mortgage at a time when the buy to let market is not subject to the same restrictions on lending and repayments are cheaper because they are interest-only.

You could wait for house prices to crash and become more affordable but the last decade has shown that you could be waiting a long time for that. The housing market has become so central to politics and the economy that it behaves as though it has an implicit government guarantee.

In the days before the Big Bang and lending market liberalisation in the 1980s, the standard income multiples for a mortgage were three times income or two and a half times joint income and interest rates were far higher. It is no coincidence that house prices were actually affordable then.

In the wake of the financial crisis, the Bank of England introduced rules designed to rein in risky lending, including a flow limit on the percentage of loans that can be above a 4.5 loan-to-income ratio and an affordability test that requires lenders to assess the impact on borrowers of interest rates three percentage points higher than their standard variable rate.

The Bank’s Financial Policy Committee is about to consult on withdrawing the affordability test on the basis that it has become a barrier to first-time buyers accessing the market and that the flow limit and other affordability rules are enough to guard against a surge in mortgage debt.

Recent statements from levelling up secretary Michael Gove suggest that he strongly agrees. He told The Spectator that he sees restrictions in the mortgage market as a bigger problem than the planning system and that: ‘People are paying more in rent for a property than they would do if they were servicing a mortgage. The amount that you would have to pay as a deposit to get that mortgage, I think, is out of kilter with the real risk.’

This argument certainly works politically in the wake of the Tory rebellion over planning. On the logic above Gove is probably correct but only if you look at lending in isolation. 

If you are going to rein back on reforms that will deliver more new housing, there is no extra investment for more genuinely affordable homes, your plans to rebalance the rental market to make it better for tenants seem to be on the backburner and you have no plans to reform the taxation of property, you are left with encouraging people to borrow more as your main housing policy.

You and I might call that crazy but in an insane housing system perhaps it makes a weird kind of sense.


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