What are We Doing to First Time Buyers?

Half of all first-time buyers could be denied the mortgage theywant under planned restrictions that are causing deep concern across government.Plans from the FSA will mean mortgage applicants undergoing “affordabilityassessments” to show that they can pay significantly more than the cost of themortgage they want to take out.

Proposals to restrict the terms of mortgages to 25 years and an end to “selfcertification”loans, which allow the self-employed to declare their income, are alsobeing considered. Interest-only mortgages will come under review next year. First-timebuyers already face serious obstacles to home ownership. Lenders are demandingsubstantial deposits and refusing loans or increasing interest rates for those who cannotraise them. I heard this week that ministers are deeply concerned that the pendulum infavour of regulation may have swung too far, storing up the potential for economic andsocial problems at a time when lending is already at a ten-year low. First-time buyersand those struggling with repayments are particularly vulnerable to the threat of higherinterest rates in the new year.

The number of first-time buyers in the three months to September was 5 per cent lowerthan in the same period of 2009, as most lenders continue to shun those with a 10 percent deposit or charge exorbitant premiums of between 3 and 5 per cent. TheGovernment insists the rise in tuition fees to be decided this week, potentially saddlinggraduates with £40,000 of debt, will not have an impact on their ability to borrow, butsome mortgage brokers have called this into question. Ministers believe the FSA iswrong to suggest that the changes will have a tiny impact on mortgage take-up, andthe Treasury is being warned that new regulations would encourage excessively riskaverse decision-making by banks. They have seized on Council of Mortgage Lenders(CML) estimates that show that under the proposals, 60 per cent of first-time buyerswould have been affected if the rules had been in place between 2005 and 2009. TheCML also calculates that 45 per cent of first-time buyers granted mortgages in the firsthalf of this year would have been rejected or allowed to borrow only a lesser amount ifthe mortgage rules had been in force. Overall, CML figures show that mortgage lendingwill be £9 billion this year, compared with £41 billion in 2008 and £110 billion in 2006,as banks struggle to rebuild their balance sheets. However, the FSA has pointed out thatthe 350,000 borrowers in arrears and the 54,000 repossessions last year meant that itmust ensure that there was no return to risky lending.

Two major charities, Citizens Advice and Shelter, said they supported the FSA’s proposalsto introduce tough income and affordability checks on mortgage borrowers. An FSAspokeswoman said it was aware of the sensitivity of the issue. “We are not rushing orimplementing changes right now, and we are incredibly mindful of the impact.”Mark Hoban, the Treasury Minister, has told the Commons that he believes the FSA mustlook “very carefully at the impact on home ownership and particularly on those peoplewho are looking to move shortly”.

Grant Shapps, the Housing Minister, said he did not want the FSA micro-managing themarket. “I welcome this review of the mortgage market, not least because we can seehow terribly things went wrong in the past,” he said. “It is crucial, however, to ensurethat the review addresses the problems of the future, rather than trying to fix the gaping holes of the past.”

Andrew Tyrie, chairman of the Treasury select committee, said: “We must have amortgage market that is capable of responding to the increasing diversity and flexibilityof the UK labour market. Care is required to make sure we don’t lose the competitionof the marketplace, particularly at this time. Better to get it right than rush it.”