Leading think tank urges government to cap income multiples for mortgages

It could be tougher to obtain a mortgage over the next few years if recommendations from a leading think tank are accepted by the government.  The Institute for Public Policy Research (IPPR) has urged the coalition government to formalise tight controls on residential mortgage lending in order to prevent another property price crash.

The IPPR wants to see a cap on the income multiples that lenders are allowed to apply as well as a maximum ‘loan to value’ for residential mortgages.  The moves are opposed by many banks who believe they would make it difficult for many buyers to agree the mortgage or remortgage they need.

Tight controls on income multiples should be formalised in law

The leading policy research organisation believes that the most recent house price boom/bust was caused by the easy access millions of borrowers had to cheap mortgages.  The IPPR pointed out that before the ‘credit crunch’ of 2008, the UK boasted the highest average ‘loan to value’ ratio of any OECD country with the exception of the Netherlands.

In order to prevent a repeat of the recent problems, the IPPR has recommended that borrowers should only be able to borrow up to 3.5 times their earnings, compared to 4-5 times income that was commonplace in the boom of the mid 2000s.  The think tank also wants mortgages to be capped at a maximum of 90 per cent of a property’s value.

If the plans were formalised in law it could well make it more difficult for first time buyers to get onto the property ladder.  It would mean that they would have to find at least a 10 per cent deposit, which would equate to around £15,000 based on the current average house price.

House price inflation needs to be controlled

With banks and building societies mainly opposed to such regulations, the IPPR faces a tough challenge to convince the government that its measures should be adopted.  However, director of the IPPR, Nick Pearce, said: “Britain has suffered four housing bubbles in the last 40 years, each of which contributed to major economic and social problems. We must learn the lessons from this economic history.

“A central plank of economic policy should be to target moderate increases in house prices, rather than allowing runaway house price inflation which is always damaging in the long run.”

So, with the possibility that high ‘loan to value’ mortgages could become a thing of the past, getting a mortgage might continue to prove difficult for many thousands of first time buyers.

Leave a Reply