NatWest’s loan-to-income ratio has been lowered for some borrowers, which means that they will not be able to borrow as much money when buying a home. House buyers who need to pay a deposit of between 15% and 20% will only be allowed to borrow up to 4.45 times their annual salary, a decrease from the original 4.75. This new policy will apply to both joint and single earners.
This suggests that there are an increasing number of borrowers who are really having to stretch themselves to be able to buy a home as house prices are continuing to rise. Since the new rules that were enforced by the Financial Policy Committee in 2014, lenders cannot lend more than 15% of its loan book to house purchasers who are borrowing at least 4.5 times more than their annual earnings.
This rule was made so that borrowers were not overwhelmed with monthly mortgage repayments that are so expensive that they take up the majority of their income. High monthly mortgage payments may be maintainable for a short period of time, but in the long run, they can become more of an issue when interest rates start to rise. But due to house prices continuing to rise, numerous home buyers are attempting to borrow as much money as possible.
It is important that lenders are careful not to lend over the 15% limit, which is difficult when there is an increasing need for high income-to-value mortgages. NatWest’s plan suggests that it is restricting its lending to ensure that they keep within the lending limits.
David Hollingworth from London and Country Mortgages has said:
“Affordability remains to be the primary test that lenders use when making the decision of how much money they are prepared to lend. Due to the regulator’s requirements, many lenders also have limitations on loan-to-income as well.
“As the latest policy by NatWest has shown, sometimes limitations have to be tweaked to keep within the required limits. Although the majority of lenders will not want to constantly change and move around the loan-to-income caps, it is sometimes necessary, depending on the type of business that is being taken on.
“For a majority of people, the affordability tests will be a limiting factor that decides on how much money they are able to borrow, but those who can easily pass the affordability test, they may still be constrained by the maximum multiple policy.”
NatWest’s move has been due to the continuing rise in house prices – the latest index from Halifax has suggested that values are up by 10% on last year. In the meantime, the Office for National Statistics found last month that wage growth was at its lowest level over the last twelve months.
A NatWest spokesman has said:
“To ensure that we are always within the Prudential Regulation Authority limits, we are constantly monitoring our loan-to-income limits and make changes to them when it is required.”
The director of Online Mortgage Advisor, Pete Mugleston, does not believe that NatWest’s move will have too much of an effect or cause a huge stir. He has explained:
“The NatWest affordability test has always been a lot more generous than a lot of other lenders on the high street. With the Financial Policy Committee implementing the new policy of all lenders reducing their percentage of loans for over 4.5 loans-to-income, NatWest must be pretty close to their limit.
“I do not think that NatWest will necessarily cause a stir in the market if other lenders are ‘following suit’ as a lot of the big criteria changes also happened at the time this was introduced. Many other lenders capped loan-to-income on large loans and others even lowered their affordability levels so that max loan sizes are reduced.”
The continuing rise in house prices is having a huge effect on our economy. It is becoming more and more difficult to buy a property and an increasing number of borrowers are really having to stretch themselves in order to buy a property. But what does this all mean for those who need to borrow to be able to afford to buy a home?
© www.propertysurveying.co.uk PE