Thrifty Loans

Chancellor of the Exchequer Alistair Darling has ticked off lenders for fuelling an ‘unsustainable’ house price boom. He said that they should show more responsibility in their lending, and he also predicted a ‘slowdown’ in the property market. He urged lenders to show more caution with lending and take account of a borrower’s ability to pay the loan back.

Plainly annoyed at the practices of banks and building societies, Mr Darling said they should ask ‘more searching questions’ to prevent borrowers overreaching themselves. In 2006, Britain’s second-biggest lender, Abbey, was able to grant loans of five times the borrower’s salary, and sometimes up to seven times.

Other lenders, such as Northern Rock and the Halifax subsidiary Birmingham Midshires, able to lend money to the value 125% of a home. The Income Stretch deal offered by Darlington Building Society allowed for loans up to six times salary.

According to the Financial Services Authority (FSA) interest-only mortgages are becoming more popular. These appear cheaper because the borrower is only paying back interest every month, but they still have to pay back the capital at the end of the loan. Yet, the FSA said that one in ten had no idea how they were going to pay back the loan, simply relying on a growing property market to boost the equity in their property. Yet, in the early 1990s the house price crash left many borrowers with mortgages larger than the value of their homes. The result of this is to leave them in negative equity.

“I think that lenders need to be clear that firstly somebody can afford to meet the repayments whatever they are - that they haven’t overstretched themselves,’ said Mr Darling. “If lenders take a more robust view of what they are doing that’s not a bad thing at all.”

Meanwhile the Department for Communities and Local Government announced that property prices were still rising at an 11.4% annual rate in August, down from 12.4% in July.