Most people are aware there is a limit to how much they can borrow for a mortgage. Generally speaking this is worked out according to the income of the buyer. This amount is multiplied by a certain figure to determine the maximum amount that can be borrowed.
Now Nationwide has decided to bring in a cap on all the mortgages they agree to offer from this moment on. The cap will be set at 4.75 times the income of the person applying for the mortgage. For example if they earn £25,000 a year they will not be able to borrow more than £118,750. This will apply across the board not just with all borrowers but also to all residential lending.
Slightly higher than some other caps imposed by other lenders
While this cap is a little more generous than those imposed elsewhere, it is applied to everyone. In contrast Lloyds Bank and RBS have decided to impose a limit of four times the amount of income earned. However this cap only comes into play for loans that are worth more than £500,000. The news from Nationwide follows a similar situation coming into force at Santander.
Falling in line with the rules imposed by the Bank of England
The Bank of England has decided that a mortgage cap on income must be brought in from October. However their cap relates to the market as a whole. It states that no more than 15% of mortgages provided by any mortgage company can be granted to anyone at four and a half times the income amount or above.
Stress test is also tightened up at Nationwide
Another crucial part of the new mortgage rules is the so-called stress test. This has been created to ensure people can still afford to pay their mortgages if interest rates were to increase. Given the current low rates there is every possibility this will happen in the near future.
According to the latest information available, Nationwide will be assessing each applicant to ensure they will be able to afford their mortgage payments at an interest rate of 6.99%. It is not known what the previous rate was but it is understood that it was lower than this new rate.
Less confidence in the housing market
However this latest news concerning mortgages comes at a time when confidence in the housing market – and in housing prices – is at a low point. This is particularly obvious in the south-east, where house prices are higher than in any other part of the country.
In a sense many would-be home buyers are being pummelled from all sides in trying to find an affordable property to buy – and one they can get a mortgage on. There is every possibility other mortgage providers will check their mortgage caps too, and if that coincides with ever-higher house prices, fewer people will be able to afford to buy a property of their own. We shall be watching to see what develops next.