Contractors seeking clarity on the chances of their planned house purchase moving out of reach should take heart that any lending caps mooted by the Government will not be the initial line of defence for the Bank of England in combatting an over-heated housing market. Comments made from several market experts on the newly introduced powers afforded to the Bank of England suggest that the extension of control will be a last resort.

George Osborne sparked the debate after commenting in a recent speech that he would be handing powers to the Bank of England to enforce a lending multiple cap, if it was felt that the market was out of control. The Council of Mortgage lenders confirmed their belief that the measure would certainly be a last resort, while the former Conservative Chancellor Lord Lawson proclaimed the measure a ‘reserve power’, and further stated that it would in all probability never be used.

When Lloyds Banking Group chose to announce tighter lending limits last month, contractors feared this would have a significant impact on their ability to borrow the funding required for a new home. Halifax Bank, part of the group, have been a long-time supporter of the contracting sector and this decision raised questions about the appetite of one of the biggest UK lenders to continue lending the loans required for the majority of the London area.

Lloyds Bank

Earlier this month, the Business Secretary, Vince Cable, further proposed that this move was just one step in the right direction, and that even further caps should be introduced to curb spiralling housing prices. Cable’s presumed market wide cap would see a maximum salary multiple of 3.5 times a joint income being the most a lender should consider. For a contractor earning £400 per day, this would mean a reduction from over £400,000 worth of borrowing, to £336,000.

While the plan would come with the best of intentions at heart, with the expectation being that property values would naturally decrease over time, any move in the current market could hamper the promising levels of growth seen across the market over the past 24 months. Contractor mortgage specialist broker Mark McBurney, from Contractor Mortgages Made Easy, said: ‘Any further moves that make it harder to secure mortgage finance are going to further dampen the level of purchasing activity in the market.

‘The Financial Conduct Authority have just released the largest market-wide change to lending practices seen for many years, with the core element of this intended to force banks to implement stricter affordability checks for every new mortgage case. It doesn’t make sense to further restrict the level of funds available for funding now, as we don’t yet know to what degree the revised affordability checks will have on the market. If, after a further six to twelve months the FCA’s revisions have not had a positive effect, it would be understandable that a different tact should be taken.’

All of this discussion may be in fact academic, as the suggestion that interest rate increases will come sooner rather than later would certainly curb levels of lending for may looking to buy. The BBC economics editor, Robert Peston, stated that he felt rates rises would come over the next couple of months, during a report on the World at One radio broadcast yesterday. Peston said: ‘It looks as though the UK will be the first of the developing economies to see interest rates edging back to normal levels.

‘While the strength of the recovery is clear, it doesn't look like rates will go up in the USA, for some considerable time.’ 

Article By: Simon Butler, Senior Mortgage Consultant at Contractor Mortgages Made Easy

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