Mortgages: Shut-out 'threat' to house buyers

New rules to clamp down on irresponsible mortgage lending risk shutting thousands of buyers out of the property market and deepening house price falls, the Housing Minister warned yesterday.

Grant Shapps said lending reforms being put forward by City watchdog the Financial Services Authority must not be so severe that they exacerbate an already difficult situation for potential buyers, according to the Financial Times newspaper.

He plans to use a meeting with FSA head Hector Sants next week to call on the regulator to rethink its proposals.

The new rules include tough affordability and income verification checks, while lenders would also have to make sure people with interest-only mortgages had a way of repaying their loan at the end of its term.

The Council of Mortgage Lenders has warned that around 45 per cent of people taking out a mortgage during the past year would have been hit by the new measures if they had already been in force.

Mr Shapps claimed that under the rules he would not be able to get a mortgage on his home, despite being a well-paid Minister in his 40s.

He said he did not want to see banks return to their old ways of lending indiscriminately, but warned that it would be a mistake to "bolt the door" when the housing market correction had already taken place.

He also warned the FSA to steer away from "micro-managing" what should be a competitive market.

"The problem is that, at the moment, it is not competitive enough," he said.

Banks and building societies tightened their lending criteria significantly in the wake of the credit crunch, with borrowers now needing deposits of 40 per cent to qualify for the most competitive rates in many cases.

But the move has excluded many people from the mortgage market and led to delays in first-time buyers getting on to the property ladder, as they raise the deposits they now need.

Net mortgage lending, which strips out redemptions and repayments, fell to 9bn in 2010, well down on 110bn in 2006 before the credit crunch first struck.

It is expected to fall further during 2011 to 6bn – the lowest level since 1980.

Mr Shapps is expected to tell Mr Sants that he wants the market to be regulated, but not in a "product by product" way that would snuff out innovation.

He blamed the fall in the number of new homes built in the UK during the past year on the mortgage drought.

He said: "The building figures are the lowest for peacetime since 1924, but if you ask the housebuilders what the main problem is, they say mortgage supply, meaning a lack of people to buy their products. Planning is only second or third on their list."

But commentators have in part blamed Mr Shapps for the fall in building numbers, due to his withdrawal of regional housing targets, which were introduced by the Labour government.

They have been replaced with the New Homes Bonus incentive, under which councils are rewarded for allowing development in their area.

The budget for building affordable homes has also been slashed by the Government as part of its cost cutting measures.

Would-be housebuyers have faced increasingly tough conditions recently, with figures out earlier this week showing the average first time buyer now needs to raise a deposit of around 29,000.

That means increasing numbers rely on help from parents and those without often have no option but to wait until they are aged 30s before being able to buy.