Mortgage blog: Should mortgages be capped at three times your income?

Posted 18 June 2014

A leading politician believes that mortgage lenders are "throwing petrol on [the] fire" of the housing boom by offering mortgages at four or five times a borrowers' salary. Vince Cable, the business secretary, says that lenders should cap mortgages at three times income in order to avoid another housing bubble.

Should mortgage lending be capped at three times income? And should banks be more responsible even if it means that fewer first-time buyers are able to get onto the housing ladder?

Mortgages should be restricted to prevent housing boom

The Business Secretary says that banks are wrong to offer mortgages at more than three and a half times a borrowers' income and that they should radically curb their lending "to stop this boom getting out of control". Cable says that he is "appalled" that banks are lending up to five times income in some cases and said that the "desires of individuals" to own homes in London cannot come before financial stability.

"In the short-run, the immediate problem is to stop this boom getting out of control," he added. "It is crucially important that the banks don't throw petrol on the fire, and traditionally most of us who been through housing booms in the past have recognised that a stable level is about three, three and a half, times peoples' income."

Cable conceded that a person earning £50,000 would only be able to borrow £150,000, which would buy little in the South East. He added: "I don't want anybody to suffer [but] we've got to make sure that the boom that is currently taking place in prices doesn't get out of control.

"The desires of individuals have to be balanced against the stability of the economy as a whole. The problem is that the further prices go up, the fewer people can get into the market. Certainly in the parts of London I represent we're getting families on middle income who can't dream of getting a house under the present conditions, and so the market does need to be stabilised."

The comments come as the Bank of England has been handed powers to help to control the housing market by imposing new restrictions on lenders. The Financial Policy Committee will be allowed to step in and instruct banks to restrict lending by toughening their affordability checks or by introducing loan-to-value caps.

Keith Osborne, editor of Whathouse.co.uk, says: "A number of major lenders including RBS and Lloyds have already reduced their maximum loan-to-income ratios and a recent Reuters poll revealed that a majority of industry experts expect more curbs to be introduced. I wouldn't be surprised if further restrictions were to be implemented and these will certainly make it even more difficult for first-time buyers to get onto the housing ladder, particularly in London and the South East."

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