Introduction of loan-to-income mortgage cap slows housing market

14th November 2014


The loan-to-income cap placed on mortgages as an attempt to stymie a property bubble has created a slowdown in the market.

Research by Connells Survey & Valuation shows that the housing market has now cooled after a pick-up in valuations activity in September with the total number of valuations in October falling by 20% compared to the previous month. However, on an annual basis the figure decreased 10% from October last year.

John Bagshaw, corporate services director of Connells Survey & Valuation said the slowdown was correlated with the introduction on tighter lending criteria that was implemented in October. In June Chancellor George Osborne gave the Bank of England power to place a cap on the amount that can be borrowed over fears that increasing house prices were pushing people to borrow more than they could afford.

Under the rules lenders will not be able to lend more than 15% of their total new residential mortgages at loan-to-income ratios of 4.5 times or above.

‘On average, we have seen a 16% drop from September to October every year since 2010,’ said Bagshaw. ‘However, beyond seasonal factors, there are other things contributing to this slowdown. The introduction of stricter policies designed to restrain uncontrolled growth and protect against a return to the property bubble of 2008 have tempered the housing market. For instance the recent loan-to-income cap which came into force in October seems to have had a considerable impact.’

He added that there may be a ‘further lull’ in the housing market over the festive period and ‘looking further ahead, the general election in May 2015 is also likely to bring increased cautious with the prospect of policy uncertainty’.

The new rules seem to have affected first-time buyers the most as despite valuation for first-time buyers making up almost a third of total activity in October the number of valuation for this group was down 18% compared to September and 11% lower on an annual basis.

‘While Help to Buy has supported many first-time buyers to get on the property ladder, other new policies have introduced fresh limits to promote responsible lending. These new caps seem to have affected first-time buyers and home movers the most,’ said Bagshaw. ‘The impact of stamp duty on buyers is also not to be ignored. Though it has been a permanent feature of the housing market for a while, the prospect of a hefty tax bill is still daunting to many, especially as house prices continue to rise and push properties into higher tax brackets.’

The buy-to-let market has not been as hard hit by a slowdown as the residential market, with a dip of 7% in valuation compared to the rest of the market.

‘Buy-to-let was the strongest performing sector in a clear indication that lenders are focusing on low risk investors as a result of increased regulation. Policies like loan-to-income caps have introduced stricter lending rules but crucially do not apply to the buy-to-let sector,’ said Bagshaw. ‘there are now an array of competitive rates out there, especially on low loan-to-values.’


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