#get a mortgage
How difficult is it to get a mortgage in 2015?
Have the new mortgage restrictions had any effect on rising UK house prices?
UK house prices rise since the global financial crash
House prices in the UK rose by 9.8% on average in the year to December 2014. This represents considerable capital appreciation and a very good return for investors, especially in comparison with the low interest rate achievable on savings, or the higher risks involved in buying and selling shares in a rising but still very volatile stock market.
However, significant house price rises are not necessarily good news – house price inflation in 2014 was the highest since 2007 and, once adjusted for inflation, 2014 prices generally surpassed the previous 2007/8 peak. There are several house price indices that can produce different results and of course there are major regional differences within the UK which widely distort conclusions drawn from nationwide averages.
Every month studies and surveys are published with the most recent suggesting a slight slow in the rate of price rises, but clearly there is widespread concern that a new housing price bubble, within the context of a still weak global economy, could trigger another financial crisis with parallels to the unprecedented economic collapse of 7 years ago. One of the characteristics of the 2007/8 situation was how easy it was to obtain mortgages and other credit, as well as the wide and confusing variety of mortgage products which were then available.
In an attempt to avoid a repetition of the financial crisis there are now various restrictions on lenders and the mortgage market which are designed to take some of the heat out of the booming property market without affecting growth and housing supply too negatively. Is this strategy of mortgage restrictions working effectively or is it too blunt an instrument which simply keeps first time buyers out of the market while prices continue to rise anyway?
Average house prices for the last eight years
Source: Land Registry.
Within London there is even more regional variation than across the whole of the UK. Currently the average house price in Kensington and Chelsea is £1,294,767, more than double the average of £606,005 seven miles away in Hackney, which in turn is more than double the average of £293,134 in nearby Newham.
The mortgage market – from reckless to draconian
Ten years ago I was moving house (again) and went to my mortgage broker to arrange a new loan. There was no sense that I wouldn’t be able to borrow whatever I needed even on a fairly average income. I was somewhat surprised to be given blank forms to sign, and the broker told me he would fill in the details when he had found me the best deal. I was told this was standard practice and would speed up the process.
My self-certified interest only loan came through within days and I was confident enough in the buoyant market to exchange contracts on the new house even though I hadn’t yet found a buyer for my old house. The mortgage came through and I never missed a payment and really did not know what the broker had put on the form with regards to my status, income or outgoings.
Recently I was having my hair cut and the barber was telling me how, having separated from his wife after selling their family home and splitting the money, he was now trying to buy a small flat to live in. He had trawled the banks, building societies and mortgage brokers but could not borrow even a relatively small amount. This was despite having a reasonable deposit and having been trading in the same hairdressing business for 12 years and always making a profit. He had eventually giving up and was resigned to living in rented accommodation for the foreseeable future. At the age of 40, having fallen off the housing ladder, he had been advised by one bank that he would never get another mortgage unless he more than doubled his income, yet he knew that he could easily afford the repayments required if only he could qualify for a new mortgage.
The reality for many people is that there has been a complete reversal of position over 8 years – then mortgages were being handed out in an unregulated, cavalier and possibly economically reckless way, whereas now mortgage restrictions seem draconian, inflexible and illogical and are putting barriers in the way of people who could and should be able to borrow for their housing needs.
Current mortgage restrictions and their effect
Potential borrowers now face detailed checks not only on their income but also on expenditure in new rules introduced by the Financial Conduct Authority under the Mortgage Market Review (MMR).
These new tests look at disposable income and also the potential to absorb higher repayments should interest rates rise. The press have been full of stories of economically viable and even quite wealthy individuals failing the MMR tests.
In one case a borrower asked his existing lender for a remortgage of less than 60pc of the value of his property. He had £800,000 in savings to cover his children’s school fees, which were actually expected to only total £400,000. He asked his lender to ignore the school fees in their affordability assessment because he had made provision for them, but it refused and declined his remortgage.
In another case, a couple were approved for a £1.9m loan before the MMR deadline. A number of delays meant their original loan agreement expired and they had to reapply under the new rules. This time their lender offered them a maximum of £1.2m because they had three children under five years old. The lender said that had the children all been over five the couple would have been offered £1.5m; £2.1m would have been available had they had no children. Are the banks really trying to say that it costs £900,000 to raise 3 children?
Britain s biggest mortgage provider, Lloyds Banking Group, set the trend by refusing to lend on mortgages of £500,000 or more if the loan is more than four times the borrower’s income. As shown above, the average London house price is almost £600,000, so a borrower would need to be earning at least £112,500 a year, assuming that he had a 25% cash deposit of £150,000 and required a loan of £450,000. The bitter reality is that the average London salary is currently £35,296. In other words, a London worker on the average salary would need to borrow just under 13 times their income to buy an average London house. There is no lender in the market today who wouldn’t refuse this point blank. Even with a large deposit from the increasingly relied upon Bank of Mum and Dad, such a borrower is very unlikely to be able to secure a loan and would have to look to buy somewhere cheaper and further away from the Central London.
Before the crisis, the average mortgage was about 6.5 times income. This figure has now fallen to 5.5 and the new restrictions are designed with a long-term target of 4 times income, not just for the higher value loans but right across the market. But as house prices soar, and incomes remain stagnant, this clearly will exclude a very large number of potential borrowers.
Recent data shows that while house prices continue to rise, the rate of increase does appear to be slowing down slightly, which may well be partly due to these mortgage restrictions. With a general election just several months away, the political parties are all trying to woo voters with various housing promises including more new build homes, special discounts for first time buyers under 40, possible VAT and Stamp Duty changes, and more social housing.
Despite all of this, it is likely to remain very difficult for first time buyers and other borrowers to either get on the housing ladder or to secure new loans with such stringent and inflexible restrictions on mortgage lending.
Property Crowd – an alternative to restrictive borrowing for property investment purposes
Tough mortgage restrictions also affect investors with some spare cash who realise that property still offers very favourable capital appreciation and solid rental income returns. People in this situation should not be put off by the hassle of trying to obtain a mortgage, as there are other viable and attractive alternatives including those provided by Property Crowd, namely crowdfunded investments in fully- managed high- yielding city-centre locations, fully. Property Crowd operates under FCA regulations and you can invest from as little as £5,000. This approach may well be much easier and straightforward than using your cash as a deposit to try to get your own buy-to-let mortgage and then have all of the headaches of managing it.