State-owned banks in spotlight over lending clampdown

Donia O’Loughlin

Lloyds Banking Group made a bold move this week to apply a strict four times income multiple on Londoners who are applying for a mortgage over £500,000.

The part-state owned bank’s announcement came on the bank of a growing clamour for action to curb housing market excesses - and notably three days after Bank of England governor Mark Carney warned in an interview the Bank may itself cap income multiples to prevent a bubble.

In particular, he cited disproportionate growth in loans of more than four times income: such mortgages accounted for the “highest share of new home loans [and] are running at their highest level than at any time since 2005”.

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Other major lenders in the market told FTAdviser they would not seek to follow suit without being forced to by regulators, with HSBC in particular hinting that it saw the move as a blunt instrument by saying it was “rare for income multiples to be the deciding factor” in affordability.

Affordability has been subject to more stringent tests since the implementation of the Mortgage Market Review last month, but most lenders suggested this in fact reinforced the impression that it was not a one-dimensional measure.

One other lender did not come out against the move: the other state-backed bank, 82 per cent taxpayer-owned Royal Bank of Scotland, which refused to rule out following suit and simply stated it “reviews its lending policy continually”.

The comments could be interpreted as a sign taxpayer-funded lenders are under more pressure than their peers behind the scenes, especially in the wake of the recent RBS admission it had been strong-armed into not paying higher bonuses in line with the wider market.

Natwest, owned by RBS, also separately admitted recently that it is applying a tougher approach to affordability tests than that which is required by the MMR.

A Santander spokesperson said: “All our lending decisions are based on affordability and we always take into account the customer’s overall financial position, including incomings, outgoings and any dependents, to assess the customer’s ability to meet their mortgage payments.”

A HSBC spokesperson said: “We assess a mortgage application on a variety of factors, including affordability and income multiples. We’ve also been ensuring customers can afford repayments at a higher interest rate for several years too.

“There are no plans to make changes to our mortgage lending criteria.”

A Barclays spokesperson said “Affordability is the most important factor in assessing and approving a mortgage, with income multiples being used in addition to this to set an absolute limit to the maximum borrowing available, linked to LTV and income. A stress rate is applied to reflect the forward view of interest rates over the current five year horizon.

“Barclays will lend up to 5.5x income in certain scenarios but this will depend on a number of factors such as level of deposit, income levels and the amount of debt a customer might have.”