Under a tightening of rules being considered by The Financial Services Authority (FSA) homebuyers could face having to raise a deposit of at least 15 per cent before they can get a mortgage. The Authority has also hinted that the amount that mortgage lenders could provide as a multiple of income could also be controlled.



The Chairman of the FSA said, "We can certainly see a strong argument for us getting more involved in the regulation of mortgage products than we have in the past." The prime Minister has even suggested that 100 percent mortgages should be outlawed as loans of 100 percent – or even more in some cases – are seen as part of the discredited lending of the boom years.

When asked about 100 per cent mortgages, the Chairman of the FSA also said: "I do not think we can simply narrow it to the 100 per cent aspect. The bigger issue is should into 90 per cent or 85 per cent". This implies that the FSA is thinking about preventing mortgages being agreed unless buyers had deposits of 10 per cent or even 15 per cent of the property's purchase price.

The FSA has also hinted that income multiples could be targeted as well. Prior to the property boom, mortgage lenders often restricted the size of the mortgage to 3.5 times the borrower's gross salary. But after property prices took off, making many houses unaffordable if mortgages were restricted to that level, some lenders started to agree mortgages as high as six times salary.

The FSA believes that the issue is whether to regulate maximum loan-to-income or maximum loan-to-value. They think that loan-to-income is actually a slightly better predictor of affordability than loan-to-value.

It is true that there are arguments against regulation based on loan-to-value ratios. Some people will ask whether it is better for somebody to have a 100 per cent loan-to-value mortgage rather than get a 90 per cent loan-to-value mortgage and then finance the remaining 10 per cent via an unsecured debt or a credit card. Which ever way they go the FSA is keen to make sure that they do not have unintended consequences.

Bearing in mind the severity of the credit crunch which was initiated by excessive lending in America, it is perhaps understandable that the FSA is considering whether greater intervention in the mortgage field is the answer - but there are also dangers of too much interference.

The danger in regulating mortgages is that politicians are interfering in areas they do not fully understand. We say by all means stamp out the worst failings of the past few years but too much intervention will just make an already strangled industry even worse. A ban on 100 per cent mortgages could turn out to be the thin end of the wedge as the question is already being asked whether 85 per cent or 90 per cent mortgages are even necessary. The mortgage lending industry will undoubtedly agree now that 100 per cent deals have run their time anyway but we most definitely need 85 and 90 per cent mortgages to encourage first-time buyers to return and get the market moving again.