Melanie Bien: Mortgage lenders stop us dancing in the dark

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The Independent Online

As the debate over the future of the housing market rumbles on, it seems that no one is immune to the fallout - not even the UK's biggest mortgage lender. HBOS, the merged Halifax and Bank of Scotland group, announced last week that it has been turning customers away for fear that they might default on their mortgage repayments.

As a result, HBOS's share of the mortgage market has fallen below 20 per cent in the first six months of the year. While this may still be a sizeable chunk - indeed, HBOS retains the mantle of market leader - the extent of the dip is significant: down from 25 per cent last year and from 31 per cent in 2002.

The group denies this decline is due to some hot new rival stealing its thunder, claiming instead that it is the result of a new strategy of tightening up its lending criteria. On every occasion the Bank of England has raised interest rates (four times since November, by a total of 1 per cent), HBOS has responded by allowing customers to borrow a little less as a multiple of their salary. And if rates rise again next month, or even in the next few months - as many economists are predicting is more likely - HBOS is likely to tighten its lending criteria yet again.

While declining market share may be bad news in the short term for HBOS shareholders (of which I am one) - and, indeed, share prices did fall on news of the bank's revised profitability targets - it may be seen as the right strategy in the future. HBOS still expects a "strong set of first-half results" when they are announced next month. And it also doubled its house price forecast last week, demonstrating that it has no big concerns about the market.

However, letting borrowers overstretch themselves on their mortgage is foolhardy while the market remains uncertain, so HBOS is intervening to ensure they don't have the option. Sensible lending should mean fewer borrowers defaulting on their repayments and no need for distressing repossessions.

How things have changed. It's all a far cry from a couple of years ago, when some lenders were happy to offer five or even six times income to people who fulfilled certain criteria, such as having a deposit of a certain size or being on a good salary. Today, the absolute maximum you can borrow from most lenders is four times income (if you are buying alone), although the typical multiple is 3.5 times, as lenders take no chances. And the standard multiple if you are buying with a partner has remained pretty constant at 2.5 times.

While first-time buyers struggling to get on the housing ladder may not be impressed with HBOS's strategy, one person likely to be pleased is Mervyn King, the Governor of the Bank of England, who renewed his warnings last week about the possibility of a house price slump - just in case we didn't believe him when he made similar comments a fortnight ago. He told a Commons Treasury Select Committee that prices were above a sustainable level and the "chances of them falling are greater than they were".

But for those worried about the prospect of another rate rise next month, there should be no reason for panic. The City expects the next increase to come in August, when rates could go up by a further quarter point to 4.75 per cent. One could argue that Mr King is merely trying to alert borrowers to what could go wrong if they take on a bigger loan than they can afford - exactly the same thought that is propelling HBOS to put limits on how much we can borrow.

The message? Don't overstretch yourself. Borrow sensibly and you can carry on with your plans to move now if you need to. As I point out on pages 24 and 25, there are ways of getting on the ladder without simply borrowing more, such as buying with friends or offsetting your family's savings against your mortgage debt. If your parents are prepared to act as guarantors, and agree to pay your mortgage if you default, you might be able to borrow more than your income strictly justifies, though it's important to work out for yourself what you can afford - as well as what you can't.

As long as you could cope if rates were to rise, you should be able to protect yourself if the worst does happen.

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