Friday, 11 January 2019

The thin end of the wedge

From the BBC:

Some 140,000 homeowners are trapped on high interest-rate home loans with unregulated or inactive firms, and are unable to switch to a cheaper deal. The Financial Conduct Authority (FCA) has now said it is considering a change to its affordability checks.

This could allow these people to switch to deals that are easier to pay. At present, they are stuck on high default rates, owing to an FCA requirement - introduced in 2014 - for mortgage holders to meet strict affordability criteria when they apply for a new fixed deal.

OK, so Annie and Bert, took out a six-times income, 100% LTV mortgage under the old reckless lending rules but banks can only lend a 'sensible' multiple like four-times-income. They'll make an exception for Annie and Bert.

What about Claire and David next door, who took out a four-times-income and have done equity release to 'tap into house price growth' and now owe six-times-income?

What about Ellie and Fred across the road who took out personal loans to pay a deposit and a four-times-income mortgage who also owe six-times-income?

If that's OK for Ellie and Fred, what about Georgina and Harry, first time buyers who want to borrow six-time-income but can't? Can they reverse engineer Ellie and Fred's position by taking out two-times-income personal loans and using that as a deposit for a four-times-income-mortgage?

Where's a loophole, there's a way.


James Higham said...

"banks can only lend a 'sensible' multiple like four-times-income."

Gross or net?

Lola said...

What about George and Mildred who took out a 4 x 95% LTV mortgage who also have two cars on PCP schemes. And so on.
Many will know that I own and run a retail FS business. The FCA - The Financial Catastrophe Authority - are completely out of control; are entirely self serving and utterly clueless. Pretty well every intervention they have ever made has backfired or failed.
FWIW, pre 2008 (or more accurately pre New Labour), we could have rescued these trapped mortgagees with proper 'credit repair' mortgages from sound lenders. But the Blair Brown FSA terror from 2000 to 2008 and its consequences destroyed all those.

Mark Wadsworth said...

JH, it is expressed as four times gross salary, but it would make far more sense to express it as a multiple of net salary i.e. 4 x gross = 6 x net.

L, that would be Isabel and Jack (I was doing the alphabet). But agreed.

Matt said...

Are these people the one's who took out liar loans AKA self-certified?

No moral hazard anymore. We should fund this with a levy on everyone who had a lifetime tracker and made out like bandits when the BoE dropped rates to (basically) zero.

Lola said...

Matt. Proper self cert were always fine. They all went wrong from 1997/2000. Proper self cert were pre-underwitten by blokes like me.
MW et al. Trad ratios are 3 ro 3.5 x main earner plus once times second earner. They work.

Mark Wadsworth said...

L, the lower the ratios the better. Seeing as it costs about three man years of labour + 25% for materials to build a house, commonsense says mortgages shouldn't be more than twice joint income i.e. houses sell for approx. construction costs. Which I guess is roughly equal to 3 times main plus 1 times second.

LVT could have the same effect :-)

Matt said...


I suspect the people who are complaining about being stuck on high rate mortgages did not take them out pre-2000.

I also don't doubt that done properly, self-certified mortgages are sound. What isn't however, is a joiner claiming to earn £80k per annum (let's assume 'Up North' and not London/South-East) so he could buy a £300k house. Any fool could see that wasn't the case and so the interest rate reflected the risk of default (quite high).

Lola said...

MW. Yes the equivalent max ration for joint earnings is 2 5.

Mark Wadsworth said...

L, 2.5 times joint income seems like a just-about-acceptable upper limit. I'd prefer two-times-joint-income and a minimum deposit 15%. That'll keep house prices down.

Lola said...

MW. Yes. 2.5 was (is?) max sensible ratio. Many lenders were 2.25.
FWIW I still use these ratios as internal underwriting guidelines. I do NOT use 'affordability' criteria because they depend on low interest rates and other nonsenses.

Mark Wadsworth said...

L, I'm against price controls/caps as a general principle, but that is the beauty of loan-to-income caps, they are indirect controls/caps on the selling price of land, but without affecting its underlying value.

Robin Smith said...

All gearing up for the big boom following Brexit,bremain. And finally the 2026 crash which this time will use something different to last time to masquerade for mortgages. Same old.