New Rules for UK Mortgages
The UK Financial Conduct Authority has introduced new rules for home loans in the UK, relating to the calculation of how much a borrower is allowed to borrow.
The follows the Mortgage Market Review which has been ongoing by the regulator for the past several years.
In the UK, historically the amount you can borrow is determined directly by your income with lenders applying a multiplying factor to calculate how much they are willing to lend. So a lender might offer 4 X income as an upper limit on borrowing, or 3 X joint income for families with two wage earners. So a person earning £50,000 a year may be allows 4X this as their borrowing amount £200,000.
This multiplier varied from lender to lender, so it could be worth shopping around to see who would lend most. All of us in the UK can remember the last housing bubble, with lenders offering up to 7 times individual income as a mortgage amount. That of course went horribly wrong when the banking crisis erupted.
So the Regulator stepped in and eventually came up with new guidelines. But before I look at those guidelines, perhaps it is an idea to look at how the rest of the world assesses a borrower’s debt capacity, because it is very different to the UK situation.
Throughout most other countries, the amount a person can borrow is calculated using what is called a debt to income ratio. This is determined by looking at a borrowers net monthly income and then applying a simple percentage, which is the amount of that income, which is allowed for servicing all debt commitments. This percentage varies from lender to lender, but generally falls between 30-40% of net monthly income.
This calculation is actually a bit more complex than the old UK style. If someone is earning, £2000 net per month, then a lender may say they can utilise 40% of that to cover all debt payments, £800. The lender would then deduct all existing debt payments and see from the remainder how much debt a borrower can service at current interest rates.
The new method in the UK seems to have gone somewhat beyond this with lenders looking at affordability, but including all a borrowers outgoings. This may be a knee jerk reaction to the new guidelines. This week on the news I have seen stories of lenders including gym memberships, phone bills and all contractual outgoings in their calculations.
There are already several results of this. Some advisers have been reporting that it now takes 3 hours to gather all client information for analysis. A knock on from this, as it is now taking twice as long to talk to a client, is that lenders now have a potential shortage of staff as each application takes so much time. The Mortgage industry is worried that overall lending will become restricted and that processing times will be increased.
The Regulator is happy as loans are now being assessed based on affordability, which should lead to fewer bad loans. We shall look with interest at next months, net lending figures, to see if there has been any effect on overall lending.
More information can be found in the following article:
Stephen Brown M.D.