Several of the business sections of yesterday’s Sunday newspapers picked up on the recent decision by First Active and Ulster Bank (both part of the Royal Bank of Scotland Group) to tighten their lending criteria for 100% mortgages.
What’s happened?
Up to now, both of these banks would have lent 100% of the purchase price to any customer who could prove a capacity to make the monthly repayments (also allowing for a stress test). Occupations, for the most part, were not given specific consideration. However, the new rules only allow for 100% mortgages being provided to those customers who have secure state jobs and young professionals with strong prospects of future earnings.
Why the change?
When lending money, banks worry about two main risks:
- The customer’s capacity to repay the loan
- The risk of the loan amount exceeding the value of the property
When it comes to 100% mortgages, most banks are taking the maximum risk in relation to point 2 in that any drop in the value of the property means that the loan does exceed the value of the property. Also, given that they are prepared to lend to most occupations, they are also taking close to a maximum risk in relation to point 1.
Clearly, Ulster Bank and First Active are no longer comfortable with these levels of risk and are reducing their exposure by only lending to specific professions. This doesn’t reduce the risk in relation to point 2 but does in relation to point 1.
Will the other banks follow suit?
In our opinion, the answer is yes. The pace at which they will follow is uncertain though. This will be driven by two key factors. Firstly, the banks will be keeping a close eye on the property market. Further falls in prices will mean more banks making this move. Secondly, this year has been the first year in probably 15 years where banks have suffered a year on year reduction in mortgage lending. The sales directors in at least some of the main banks will want to at least hold off until the new year before making any change that will reduce the level of new mortgage enquiries.
The next 2-3 weeks will be very informative. It is possible that all of the banks were planning this move but just did not want to be the first into the market with their change. If this is indeed the case, we could be in for a spate of announcements over the comings days. Watch this space…
