First time buyers in London could be forced to produce a deposit of up to £127,000 under the latest mortgage lending proposals.
The Financial Services Authority is believed to be considering a dramatic mortgage crackdown that would see banks banned from lending more than three times a buyer's annual salary.
If approved, the move will rule out the vast majority of first time buyers hoping to take advantage of falling house prices.
From one extreme to the other
The FSA has identified easy credit as one of the key contributing factors to the current financial crisis, with a number of lenders offering mortgages at up to ten times a buyer’s salary in recent years.
Now, with ‘prudence’ the new buzz word in the banking sector, the regulator is looking to ensure all parties tow the line.
But if its latest proposal is brought into play it will simply be swinging from one extreme to the other and could obliterate what little buyer demand there is in the market (house sales are at a record low, while the number of FTBs has halved in the last year).
Furthermore, some analysts say the move would simply be a case of closing the stable doors after the horse has bolted, given that most lenders have already tightened their lending criteria and the vast majority of mortgage deals now require a deposit of at least 25%.
The mammoth task facing FTBs
Let’s consider a practical example of the task facing a potential first time buyer in London should the three times salary cap be enforced.
A recent survey found that the average Londoner earns £41,079, meaning he or she could borrow a maximum of roughly £123,000.
But with the average FTB home costing anywhere up to £250,000, they would need to produce a whopping £127,000, or 51%, deposit - and that’s excluding the stamp duty charge of up to £7,500.
Even at £200,000 the task would be gargantuan; requiring a £77,000 (39%) lump sum.
To put this into context, recent research from Abbey shows that the average London first time buyer is planning to save just over £26,000 for a deposit.
A bad idea at a bad time
Of course London isn’t the only place FTBs will struggle; the proposed lending cap will spell hardship for buyers across the nation.
And as we mentioned earlier, this is the worst possible time to be prohibiting potential FTBs from the market. In January, just 9,000 households were able to take the first step onto the property ladder, less than half the figure of a year ago.
Another criticism of the cap is that the use of income multiples is a fairly outdated method of calculating mortgage suitability as it does not take into account a buyers’ unique financial situation.
For example, a person with no children will likely be able to afford far larger monthly mortgage repayments than someone earning a similar salary but with seven children and thousands of pounds in credit card debt.
It’s important to stress that the lending cap is merely a proposal being bandied about in the FSA offices, and there are no plans to implement it as yet. For the sake of the property market, let’s hope it stays that way.
