FSA planning to regulate mortgage LTVs - buy now before it's too late?

The FSA has revealed plans to reform the mortgage market and it has been suggested that this could include new regulations on loan-to-value (LTV) and loan-to-income (LTI) in a bid to prevent banks lending people what it considers to be more than they can afford.

A limit on the LTV that you can raise for your house purchase or remortgage could have disastrous effects for Contractors and as such it could be a case of buy now while stocks last.

The FSA has revealed that it will publish decisions on its recommendations for the mortgage market in September of this year; however they are already hinting that many of their recommendations will be based on research into the extent to which LTV and LTI have impacted on the current crisis.

It has been suggested that the FSA will advise the government to limit LTV and LTI sizes whilst also tightening their regulation of mortgage selling and suitability requirements. With the Prime Minister writing in an article last month that he recognises the need to avoid another crisis by regulating lending in the future; it seems that the FSA's plans could be more than just hearsay.

The debate

With banks such as Northern Rock announcing that they are beginning to lend again and house prices falling to an affordable level, it seems at last as if the dark cloud that has been residing over the housing market for the past year may finally be lifting.

With this renewed hope however, comes a palpable sense of trepidation from lenders and consumers that Gordon Brown is to question the future of mortgage lending at high LTV's and the FSA is to review its stance on the matter.

There is a fine line between encouraging lending and borrowing in order to breathe new life into the housing market, and allowing consumers to potentially stretch themselves by borrowing too much to buy or remortgage their home.

However, whilst preventing homeowners from borrowing beyond their means is commendable, it could be argued that preventing homeowners from prioritising their own spending within their own personal household budget is a step too far. Our experience of Contractors who have taken out relatively high mortgage borrowing is that they have simply taken a mature personal decision to spend a greater proportion of their income on buying a property rather than, say, on holidays or a more expensive car. The question is whether the state should be dictating individual spending patterns to this extent.

Some reports are claiming that the FSA could limit LTV's to just 85% which would seriously impact the number of homeowners coming on to and moving up the housing ladder. In the spirit of preventing another market crash in the future, this could be a potentially damaging long-term decision.

What impact could this have on Contactors who own their own home already?

In the current housing market there is already pressure on your LTV as a result of the loss in value that you may have suffered as a result of falling house prices. It is increasingly difficult for Contractors that are nearing the end of a mortgage term to remortgage for a better rate as many houses have fallen in value since your last remortgage.

As such, limiting the LTV that you can raise on your home could have a significant impact on your ability to raise capital from your home to fund your business, home improvements or a new business venture.

What about first time buyers?

If you are looking to take advantage of the lower property prices and take your first step onto the property ladder then a cap on the LTV rate will affect the amount that you can borrow against a property. This means that you will have to put down a larger deposit than you might otherwise have had to save.

For a first time buyer a deposit is one of the major barriers to getting onto the ladder and if the FSA is able to regulate LTV's then it could become more of a hurdle. If you are able to get a mortgage with an LTV of 95% for example, then you only have to find a 5% deposit which is achievable for most first time buyers. However, if you can only get an LTV of 85% for example then you will have to find a 15% deposit. On a £200k property this would mean saving a deposit of £30k which could be a huge ask for the average first time buyer.

What options do you have?

Firstly, these plans are by no means finalised and we will know more about the future of LTV regulation when the FSA releases their report in September. It is advisable to make use of the current LTV's available from lenders before any changes come into place and as such we advise you to review your current rate.

If you are a first time buyer then saving a deposit and ensuring that your credit history is clean will be essential if you want to secure a competitive rate on your mortgage and this should be your top priority. As a Contractor, securing a mortgage can sometimes appear difficult because many High Street lenders will dismiss your application because they don't understand the nature of your contract-based income.

At ContractorFinancials, we have over ten years experience of finding Contractors the mortgages that suit their circumstances and the lenders that will welcome you as a client. We have been able to secure lasting relationships with lenders in order to offer our contract based mortgage underwriting at competitive rates.

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