Why mortgages will remain hard to get

This isn’t the best of times for those looking for a mortgage. A mere 63,000 were approved in April, down from almost 76,000 in January. That might sound like a lot. But the long-term average from 1993 to 2007 was more like 99,000 a month, says David Smith in The Sunday Times.

Some of this is down to the change in focus of the Funding for Lending Scheme away from mortgages, and some will be a consequence of the April introduction of the Mortgage Market Review (MMR), which forces lenders to be sure that borrowers can afford the loans they are offered.

But even as the MMR beds down, there is good reason to think that mortgages – while cheap if you can get them – will remain relatively hard to get. Why? It’s all about the Financial Policy Committee (FPC).

This is the part of the Bank of England that is responsible for what is known as ‘macroprudential policy’ – but which might be better described as ‘credit control’. The FPC has the power to demand that banks place restrictions on mortgages, or that they hold extra capital against certain types of loans, for example.

It next meets on 17 June and – given the sharp rises in house prices across the UK – it is expected to introduce some restrictions on mortgage lending.

What kind of restrictions? There could be a clue in the fact that RBS and Lloyds have already introduced caps on mortgages over four times income: it is entirely possible that the FPC’s decision (should it interfere at all) will be to demand that all banks follow RBS and Lloyds, or that they hold more capital against all high loan-to-income mortgages than against others.

Otherwise, it might insist on a cap on loan-to-value ratios (stopping lending of more than, say, 90% of the value of a house). Finally, it might limit mortgage terms – note that RBS has already said it is to cap the length of mortgages at 30 years.

This could be something of a game-changer for the market. Back in 2000, says Alex Hawkes in the Daily Mail, 1.6% of mortgages had terms of 30 years or more.

Today, thanks to efforts from buyers to make their payments more affordable, 28% do. “For the first time ever, longer loans exceed the number of standard 25-year loans” (currently sitting at 27% of loans).

There isn’t much you can do about any of this, except to rush through any high loan-to-value deals you currently have on the go – the rules will be the rules.

But it may be that a high-ish percentage of MoneyWeek readers won’t much care. “Astonishing” new data from estate agency Savills shows that cash buyers now make up 35% of UK property purchases, says Emma Wells in The Times. That’s the highest proportion ever (even in 2007 it was only 25%).

So, cash buyers might now want to wait until the new rules have been introduced – they should mean less competition and maybe even lower prices across the board.