Lloyds leads tightening of home loan conditions

Scotlands babyboomers developed a taste for the good things in life but not saving. Picture: Getty

The state-backed bank has announced that it will lend no more than four times salary to anyone applying for a loan of £500,000 or above.

It said the measure was aimed at mitigating “specific inflationary pressures in the London housing market”, echoing Bank of England concerns that some borrowers could over-extend themselves as the market heats up.

The new Lloyds cap affects borrowers all over the UK applying for loans through its mortgage brands, including Bank of Scotland, Halifax and Scottish Widows Bank. It means borrowers applying for a £500,000 mortgage will need a single or joint salary of £125,000.

The move came just weeks after new rules took effect as part of the mortgage market review (MMR) requiring lenders to assess borrowers on affordability.

It comes as a surprise at a time when lenders are focusing more on affordability than on multiple of salary, according to Lorraine O’Shea, director at Honour Financial Planning in Edinburgh.

“It makes a mockery of the MMR,” she said. “If a loan is being properly underwritten by a lender, with all the affordability checks and interest rate stress tests, then surely the resultant loan amount should stack up even if it is more than four times income?”

While relatively few Scottish borrowers will be affected, those that are looking for loans in excess of £500,000 face a sizeable drop in the amount they can borrow, said O’Shea.

And she expects similar moves from other banks as concerns grow over house price inflation in parts of the UK.

“It seems that whenever a major player announces a big criteria change, others jump on the bandwagon and follow suit, so I wouldn’t be surprised to see this happen,” said O’Shea.

But Dr John Boyle, director of research and strategy at Rettie & Co, believes that irresponsible lending isn’t currently an issue. He pointed out that while mortgage lending has increased, the number of loans advanced in Scotland last year – 30,000 – was less than half the pre-credit crunch level.

“Lending has come back a little in recent times, but from a very low base and, historically, it remains at low levels, even with the likes of help-to-buy improving access to finance,” said Boyle. “The banks simply must take a more cautious attitude to lending given what happened last time, the need for greater core capital requirements and new regulations like MMR.”

The new Lloyds cap will affect very few borrowers outside Aberdeen and Edinburgh, according to one Fife solicitors and estate agents.

Michael Maloco, of Maloco + Associates in Dunfermline, said: “The median salary in Dunfermline and west Fife is around £22,000. At four times income this means that a first-time buyer could borrow up to £88,000, so with a 5 to 10 per cent deposit over and above this borrowing ability, it does mean that most starter homes are within reach.”

Those higher up the chain and moving on or remortgaging should also be able to borrow with a multiple of four times income, provided they have equity in their home, said Maloco.

He added: “A key test from a wider economic perspective is whether your emergency service workers, nurses and teachers can afford to live in the area where they work and still have a life that allows family treats, a holiday and so on. In west Fife this proposed ceiling would accommodate this.”

But the new affordability rules are causing problems for borrowers, said Maloco.

“We now warn clients that a mortgage offer will typically take six to eight weeks to be issued, which in turn is slowing down the conclusion of contracts and causing anxiety for buyers and sellers who are in limbo whilst contracts remain extant.”