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Are lenders worried borrowers are overstretching themselves?
A high street lender has introduced stricter loan-to-income (LTI) criteria for assessing whether or not to provide mortgages to applicants.
NatWest’s LTI previously stood at 4.75 but has been lowered to 4.45 where the buyer has a deposit worth between 15 per cent and 25 per cent of the property’s value, according to This Is Money. This follows the Financial Policy Committee’s 2014 recommendation that no more than 15 per cent of all new mortgages are given to applicants borrowing 4.5 times’ their earnings or more.
Why have they tightened the rules?
In 2014, the Mortgage Market Review was published, laying out guidelines mortgage providers had to follow to ensure the industry treated borrowers fairly. It meant that lenders had to put in place stricter guidelines about who they would lend to, by weighing up how much an applicant wanted to borrow against their earnings, outgoings, other financial commitments and their credit history. Applicants are also stress tested, to calculate whether they could still afford their mortgage repayments if the interest rate went up; with a three per cent rise the typical sum tested for.
These rules are designed to prevent mortgage applicants from borrowing more than they can afford. While taking out a large mortgage may have helped buyers bag the property of their dreams, if their circumstances changed – say, if they lost their job or had a child, or if interest rates went up – they may start to struggle with those repayments. And if they began to miss their payments, their home would be at risk.
With UK house prices continuing to rise – research by the Office for National Statistics this year found that house price growth was outstripping wage increases – there are concerns that home buyers may be over-stretching themselves when taking out a mortgage.
Because lenders only have a 15 per cent window through which they can provide mortgages with a higher loan-to-income than 4.5 per cent, they have to be careful they do not exceed this as demand for higher LTIs increases.
How does this affect buyers?
While on the surface these rules may seem as though they’re just making it harder for buyers to get a mortgage, they’re actually in place to protect them. By only borrowing what your lender thinks you can comfortably afford to repay, the chance of you getting into difficulties with your repayments is kept to a minimum.
To give yourself the best chance possible of getting the mortgage you want, you should take the time to save up a sizable deposit. The bigger the deposit, the more the loan-to-value ratio should work in your favour.
You should also take a look at your credit history and make sure all the details are up to date. If you notice anything like a missed or late payment you don’t think is right, contact the credit reference agency you accessed your credit history through to ask for it to be fixed.