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Mortgage Lenders React to Rising Property Prices

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Fears that rising property prices could result in another housing bubble have already drawn comments from politicians about the future of the Help to Buy scheme, but now lenders are starting to take action to try to tackle the growing costs of buying a home.

Lloyds Banking Group, the largest lender in the UK, which includes brands such as Scottish Widows, Bank of Scotland and Halifax, has just announced that it will be imposing tighter restrictions on its mortgages. Lloyds will now be capping its high value mortgages, in an attempt to address what it calls the “inflationary pressures” that are operating in the UK market, particularly in London. The cap will apply to anyone who is taking out a mortgage for more than £500,000. It will limit the amount that these people can borrow to a maximum of four times their income. The goal is to try to avoid problems with unaffordable mortgages and to limit growth at the higher end of the market.

The announcement from Lloyds comes in the wake of a sharp increase in mortgage lending during April. The Council of Mortgage Lenders revealed that the total of mortgage advances made in April added up to £16.6 billion. This was an 8% rise over the previous month, but it marked a 36% rise compared to the same month in 2013. Property prices have also been increasing rapidly, particularly in London and the Southeast, the areas where Lloyds’ new measures are likely to have the most effect. According to the Office for National Statistics, prices in London rose by 17% between March 2013 and March 2014.

The problem, according to Lloyds, is largely the limited supply of housing, which has allowed house prices to rise much faster than incomes, leaving borrowers struggling to afford properties worth many times more than their annual incomes. If property inflation continues at the same rate, it is predicted that the average cost of a London property will rise above £500,000 by the end of 2014, the level at which Lloyds’ cap on lending will be applied.

Although the new restriction on lending by Lloyds will mainly impact people buying higher end properties in London, it is likely that further restrictions on mortgages will be introduced by other lenders, which could affect buyers in other areas and price ranges. Politicians and lenders are being forced to react to rapidly rising property prices and mortgage lending in order to try to keep growth under control.

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