'Dear Chancellor, don't cap mortgage lending'

Chancellor George Osborne said this week there could be a cap on the amount mortgage holders can borrow as a percentage of their property value to stop them over-exerting themselves financially. Mortgage guru Ray Boulger (pictured right), from broker John Charcol, thinks it's a bad idea, as he explains below...

We've been here before. Only two years ago the FSA considered introducing the ability to introduce a cap on mortgage loan-to-values (LTVs) together with a cap on the amount they could borrow as a multiple of their annual income.

Sensibly, it rejected both ideas. Both of these tools would be extremely blunt instruments and an LTV cap would be particularly damaging, not just for first-time buyers (FTBs), but also many first-time movers who bought their property in the years shortly before the credit crunch. They may now find it difficult to move because they have little or no equity in their property.

I am old enough to remember the car industry in the 1970s when it was the Government's punchbag for trying to control the economy.

Back then, most people bought their car on hire purchase (HP) and the Government controlled the minimum deposit required. If it wanted to cool the economy, the minimum deposit was ratcheted up, and vice versa if it wanted to stimulate the economy.

So car workers were sometimes put on a three-day week, and given overtime and even night shifts at other times as manufacturers tried to match unstable demand.

Wind the clock forward 40 years, and the new punchbag if LTV caps are introduced will be house builders, an industry the Government has tried to support since the credit crunch.

That sort of volatility is no good for anyone. If the Government or the regulator tried to control mortgage deposits, then you'd hope it would be better than anyone else at spotting trends in the market. History proves that is far from true.

Separating 'haves' and 'have-nots'

One major problem with introducing an LTV cap is that it would seriously increase the social divide. Latest figures from the Council of Mortgage Lenders show over 80% of FTBs now get help from their family.

If FTBs have to find even bigger deposits, those who lose out most will be the ones whose family are unable or unwilling to help.

FTBs already getting help from their family would, in many cases, be able to get a little more if necessary to meet a higher deposit requirement. I don't see an election slogan along the lines of "we introduced policies to discriminate against those FTBs without parental help" as winning many votes.

Furthermore, the Government has promoted low deposit mortgages with shared ownership schemes through housing associations, such as the First Buy scheme for new-build properties and the insurance-backed mortgage scheme due to launch in April, all of which only require a 5% deposit.

It would be helpful to have some joined-up thinking from the Chancellor.

If LTV caps were introduced it would simply encourage the market to find other solutions to satisfy demand. One option would be a long term unsecured loan to fund part of the deposit, thus allowing a lower LTV requirement for the mortgage.

Schemes haven't worked

Previous Government attempts to micro-manage the mortgage market have failed miserably. Who now remembers the CAT-standard mortgages of the early part of the last decade?

The FSA is being split into two next year, with one body being given responsibility for big economic picture regulation and one for consumer protection.

There is a real danger that, despite assurances to the contrary, both regulators will introduce policies which, together, will have a destabilising influence on the market.

The best strategy will be to concentrate on big picture regulation. If this works, together with new banking regulation, there will be no need to micro-manage the market by imposing LTV caps.

An analysis of searches in January 2012 on unbiased.co.uk's 'find a mortgage adviser' facility found that first-time buying was the most sought-after area of advice.

It made up 41% of all enquiries, up from 36% in December and 33% in November last year, suggesting FTB interest in acquiring a property is actually increasing, highlighting more and more people are actively looking for help.

As a general rule, a smaller deposit means a smaller mortgage choice, a higher interest rate and a greater chance of being rejected. So borrowers should be encouraged to find a bigger deposit, if possible.

But that is very different from the Government forcing them to do so.

Views expressed are not necessarily those of MoneySavingExpert.com.