FSA plan to limit mortgage lending will hurt first time buyers

Commenting on the news that the FSA is tomorrow likely to announce a limitation on mortgage lending of more than three times a borrower's income, Ray Boulger of leading UK mortgage broker John Charcol said, "The Government has said that it wants to help first time buyers. Limiting them all to borrowing a maximum of 3 times income will surely do the exact opposite. Why should someone who chooses to allocate a higher proportion of their income to their home than someone else for whom a maximum of 3 times income may be appropriate because they choose to spend more on, e.g. cigarettes, alcohol, eating out, clubbing and holidays, be penalised?

"Furthermore, if mortgages are limited to 3 times income many borrowers who have borrowed more than that, but have a perfect credit rating, would be denied the opportunity to remortgage or move house, and would therefore be at the mercy of whatever uncompetitive rate their current lender chose to offer them, in the knowledge that they were a totally captive customer.

"While 3 - 3.5 times income was the norm 20 years ago when mortgage rates were frequently well into double figures and it was necessary to budget for rates up to about 15%, in a low interest rate environment a higher level of borrowing is clearly more affordable. Rates will of course rise significantly from current levels; however it is surely unlikely that Bank Rate will have to shoot back up into double figures in the foreseeable future.

"The FSA has previously encouraged lenders to use "affordability" instead of income multiples as the basis for deciding how much to lend and all the major lenders have adopted this approach over the last few years. Going back to old fashioned income multiples would be a seriously retrograde step and particularly so with a multiple as low as 3."

There are many factors other than income to take into account when deciding how big a mortgage is affordable, including:

Interest rates.
Whether the rate is variable/a short term fix/a long term fix.
Single or joint applicant.
No of dependents, if any.
Other financial commitments such as loans, credit cards, maintenance payments.
The amount of income (someone on a high income can afford a bigger multiple than some on a low income as a smaller proportion of income is needed for other necessities).