Banks still lending irresponsibly

20 October 2009

Modern block of flats

High street banks are still offering first-time buyers with substantial deposits unaffordable mortgages that would leave them living close to the breadline, new research by Shelter's ROOF magazine has revealed.

In a 'mystery shopper' investigation, a 28 year-old single man with a deposit of up to £27,000 and a salary of £28,000 a year approached nine leading banks and brokers for a loan for his first property.

Despite banks repeatedly claiming they do not lend irresponsibly, repayments on many of the loans offered came to more than half of the borrower’s monthly income, with the highest loan to income value at 5.5. The amount left over would leave the borrower only just enough to cover basic living costs.

Although the mystery shopper was ready to provide all figures relating to his income and expenditure, he was asked very few detailed questions about his financial circumstances to ensure he wouldn’t be overstretching himself.

Shelter warned that just a slight drop in income due to reduced working hours or an unexpected bill could push borrowers into arrears and at risk of losing their home.

Among the worst offenders uncovered by the investigation were household names Alliance & Leicester and Barclays Bank, who offered loans of £153,720 and £140,000 respectively.

Monthly repayments came to £989 - 56 per cent of the borrower’s total income of £1,770, leaving just £781 to cover all other living expenses and household costs. This is just £53 over the Minimum Income Standard for a single working male calculated by the Joseph Rowntree Foundation. For borrowers in such a position it would only take an unusually high utility bill to push them into financial difficulty.

Shelter yesterday welcomed the launch of the FSA’s Mortgage Market Review, which could see stronger checks on a customer’s financial situation and a clamp down on self certification of income when mortgage applications are considered by lenders. 

Kay Boycott, Shelter’s director of policy and campaigns, said the review delivered ‘tough proposals’.

But she warned: 'With the mortgage market rising and lenders again reverting to high risk 95 per cent loans, the FSA must implement these solutions urgently to ensure the dark days of reckless lending never return.'

Ms Boycott added: 'Every day Shelter’s mortgage counsellors see the misery of homeowners who have fallen into arrears or are being repossessed because lenders have handed out mortgages they couldn’t afford. 

'When people overstretch themselves to the brink, an unforeseen bill or emergency can easily tip the balance of being able to afford a mortgage or not.'

Ms Boycott said: 'The first time buyer market is vital to getting the economy moving again, but there is no sense in giving a mortgage to someone who cannot afford it. This must also include people who self certify as well as first time buyers.

'As one of the biggest providers of arrears and repossessions advice in the country Shelter has a duty to protect consumers, and we have tirelessly campaigned for these regulations. Now the FSA has accepted the need for tougher action, it must drive the changes through as soon as possible.'

Shelter also welcomed the proposal to regulate buy to let mortgages, and ensure these new landlords act responsibly towards their tenants.

Ms Boycott said: 'We have seen many buy to let landlords borrow excessively, believing they’ll make quick profits. But when these amateur landlords hit financial difficulties it’s their innocent tenants who face eviction and homelessness.'

Offers from other lenders approached by the mystery shopper included:

  • RBS, which offered a loan of £133,000 at repayments of £901.35 a month - 51 percent of the borrower’s income, leaving £868.95 a month for living costs.
  • NatWest, which offered a £133,000 loan with monthly repayments of £905.52 - 51 per cent of the borrower’s income, leaving £864.78 a month for living costs.
  • CMG brokers, which offered a loan of £140,000 loan with repayments of £901, leaving the borrower with £869.30.
  • Direct Line, a member of the RBS Group, which offered a £135,000 loan with monthly repayments of £944.70, leaving the borrower with just £825.60.

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