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Lending Controls, Yes - But The Cost Will Be High

Most old-fashioned lending bankers would probably see the belated recognition that we need to reintroduce lending controls as a step in the right direction.  For some time now, some of us have argued that there should be limits placed on the amount people can borrow, both from a salary and loan-to-purchase value point of view.  We should never have abandoned them in the first instance, and it's about time those in charge admitted their error.

There is no case (and never has been) for allowing anyone to borrow 100% of the cost of anything – not even a car – and the steps to urge the banks to impose a deposit requirement on mortgages are steps in the right direction.  We should, however, enshrine this in law; not leave it to bankers' discretion.  Nobody should be able to get anything more than an 85% mortgage – and prove that the other 15% is not borrowed from somewhere else.  Equally, they must not be able to get more than 4 times proved income – 3 times if the proved income is joint with a partner.  There should also be a 15-20% deposit requirement for all other types of personal and home improvement loans (cars, kitchens, etc.).  Only when this is done will we be able to prevent similar debt problems occurring in the future, as it will be much more difficult for people to overstretch themselves.  It will also mean that the credit industry will have to go back to examining income statements, etc. rather than relying solely on credit scoring.  This will be a good thing, as the general public will find out more about how to assess their own ability to service a loan, rather than leaving it to a computer to hand down a simple yes/no result.  We'd all learn to manage finances better if we had to have a meaningful discussion about our finances with the bank before borrowing money.

One thing that HMG needs to be aware of, however, is the further adverse impact this sudden outbreak of financial sense is going to have on the economy.  Placing restrictions like this is going to bomb the housing market still further, as prices will simply have to come down an awful lot before people will be able to afford to buy.  With the salary multipliers caps, for instance, most people wouldn’t be able to afford a mortgage much above £80-£100k, which means houses will have to come down an awful lot more to get people interested in buying and able to buy.  Equally, the deposit requirement will mean that many people defer entering the market for many years to come.  Don’t forget also that most graduates coming out of Uni already have a sizeable debt that they’ll have to repay before they can start building a deposit, so most of them will be out of the market…

The further collapse in house prices in turn means that loads of people will be trapped in negative equity – for years if not a decade or more – whilst they pay off enough of their mortgage to bring it below the much-reduced value of their homes (and of course ploughing more into repayment means they have less to spend on other things).  I hope HMG has thought of this, although their announcement of the expansion of mortgage lending through NR seems to suggest they haven’t.  Just how do they expect to lend £14 billion over the next 2 years with these kind of restrictions?  Only if there is a serious collapse in house values will people be able to borrow from the bank.

At the end of the day, we will have to return to this type of sanity in lending, and we will have to face the fact that some people will struggle, for many years to come, under the weight of the debts they have accumulated.  The Government should be brave enough to take these steps and also be honest enough to explain to people clearly what the consequences are.  Given the fact that, so far, they’ve been happy enough to sacrifice the financial well-being of those who were more prudent, in order to lessen the pain of those who weren’t, I somehow can’t see that happening to the extent to which it should.

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