The Financial Services Authority (FSA) are considering introducing restrictions on the initial size of mortgages, according to Lord Turner’s review of banking regulations.

The report suggests reasons for limiting the amount of money that can be borrowed in order to purchase a home in order to protect consumers from borrowing too much and also protect banks from the potential threat of excessive lending.

However, Lord Turner has been the first to admit to potential disadvantages to the idea of restrictions, and therefore the FSA will discuss the issue in the autumn.

The review says: “The rapid extension of mortgage credit was a key factor in the origins of the financial crisis in the US, the UK and several other countries.

“In the UK high initial LTV (loan-to-value) and LTI (loan-to-income) ratios played an important role.”

Market Discipline Not Working?

The Council of Mortgage Lenders (CML) is welcoming the discussion, saying: “We see the FSA’s September paper on the future of mortgage regulation as a real opportunity to help shape a future regulatory landscape that will serve both lenders and consumers better.”

If the decision to legally limit mortgage size does go ahead, it would mean that it has to fundamentally change its previous policy.

The regulations have previously focused on the health of the financial service and making sure customers are treated properly and letting both sides make their own choices.

But the “market discipline” would help both individual customers and banks from taking excessive risks with money has been disproved in the last 18 months.

The review states that: “Both some customers and some providers relied imprudently on the assumption that ever rising house prices would reduce the risks otherwise inherent in high LTVs.”

Serious Disadvantages

September will see the publication of the FSA’s paper, which will look at various ways in which mortgages can be regulated. This will include things like formal limits on either the LTV or LTI ratios.

The report will also protect lenders and borrowers, and limits on the mortgage market could stop rising house prices exaggerating wider economic rises and falls.

Some countries, for example: Hong Kong; Netherlands, Greece, Poland; and Austria, already have formalised restrictions on the size of home loans.

However, the potential disadvantages of the idea are serious. For example, some people could be kept out of the property market as they can’t find enough money to put together a deposit, therefore not allowing them to buy a home.

Other borrowers may get around the restrictions by borrowing the extra money needed elsewhere, such as on credit cards, which will prove an even greater expense in the long run.

The Royal Institution of Chartered Surveyors (Rics) is worried about this: “Restrictions on mortgage lending run the risk of stifling activity in the housing market and could cause more problems than they solve.”

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