There have been articles in the press recently that the FSA could be making an announcement about future lending guides. These articles say that the FSA may limit mortgage lending to 3 x salary.
It is easy to see why the FSA might suggest this. Repossessions are on the increase despite a fall in mortgage rates and the general cost of living is going up. It is also proven that lenders were lending recklessly which has led to some of the problems of the credit crunch. Is setting the lending limit at 3 x salary a good idea then?
On a positive note it would ensure that if you can get the mortgage, you can definitely afford it as well as cope with increased mortgage payments when interest rates go up. This would mean that the lender’s exposure to bad debt in the future would be minimal. It would also encourage lenders lending to each other again and not being so worried about not getting their money back.
It could also have some very negative points too. Right now first time buyers are finding it hard enough to get on the property ladder so setting a lending limit would make it even harder. Without first-time buyers it is difficult to form chains which keep the housing market moving. Also, what would happen to existing customers coming off fixed rates onto variable rates? It could be that the product they were offered by the existing lenders may not be competitive yet they couldn’t remortgage due to them not meeting the lending affordabilty guide. This would disadvantage the borrower and give the lender the ability to treat variable rate customers exactly how they wanted.
Personally I cannot see how a 3 x lending limit would help the housing market. In fact, I think it would push the market further into negative equity. House prices could tumble where people were desperate to get out of mortgages they now could not afford in the FSA’s eyes.
Affordability is different for everyone and simply applying a limit according to salary is not the answer to a very big problem. A lot of the people who can’t afford their mortgages now cannot do so because they have lost their jobs. Even if somone gets a mortgage and fits the 3 x salary model they too would struggle to make payments if they were made redundant.
I would be interested to see what other people feel about this story so please leave comments. Obviously the FSA have not actually made this comment yet and they may never make it but it is getting people worried so maybe it is worth discussing.
