The UK largest lender, Lloyds Banking Group, will limit mortgage lending to four times on loans of £500,000 to homeowners.
Lloyds, which owns the Halifax, are introducing the new borrowing limit to address the specific inflationary pressures of the London property market where house prices are now 30% higher than their 2007 levels.
The value of mortgage lending has increased by 36% in the last year and the Bank of England Governor Mark Carney has warned about the risks of high loan to value mortgages.
Other lenders are expected to follow Lloyds example with tighter borrowing requirements to reduce the risk of riskier lending.
London prices forcing change
The London property market continues to rise with prices 17% in the last year which is twice the average for the rest of the country. Lloyds currently lends mortgages to 16% of homeowners in London.
The rise in house prices in London allows the older equity release buyer to access wealth in their property with a lifetime mortgage to repay an interest only mortgage, home improvements or pay university fees for grandchildren.
According to the Office of National Statistics (ONS) the average price of property in London is £459,000 although Lloyds expect their action will only affect 8% of loans to homebuyers in the capital.
Changes to mortgages introduced by the Mortgage Market Review (MMR) in April this year has shifted lenders away from a basis of using multiples to a measure of affordability instead.
Historically lenders applied strict multiples for homeowners borrowing over £500,000 but with the new regulations since the MMR, affordability takes into account outgoings such as child care, holidays and living costs.
In some cases where income is high and outgoings low, multiples could potentially be seven of eight times earnings and Lloyds will now impose a multiple cap of four times where the value of the loan is £500,000 or more.
Mortgage lending still strong
Data from the Council of Mortgage Lenders (CML) shows mortgage lending for April is at £16.6 billion. This is 36% higher than the same month a year ago at £12.2 billion and the highest total in a month since the beginning of the 2008 financial crisis.
House prices have increased faster than wages in the last year and mortgage multiples of 4.5 times are up from 5% of the property market last year to 11% this year.
For remortgage buyers higher prices give them an opportunity to release capital which they can use to improve their home.
Some experts have called for the second phase of the Help to Buy scheme to be restricted to dampen demand.
The government backed Help to Buy scheme assists first time buyers and home movers to purchase their homes with a deposit of as little as 5% with the balance being a mortgage from a lender.
What are your next steps?
Speak to our LCM mortgage advisers if you are planning to move home, buying your first home, remortgaging your existing home to a new cost effective mortgage deal or are a buy-to-let investor.
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For equity release buyers our London City Mortgage brokers can recommend lifetime mortgages allowing you to receive cash from your property to help maintain your standard of living as costs rise or buy a more expensive home.
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