What Canada has to teach us
A different style of mortgage planning that could help to keep credit sensibly moving in the housing market
Hindsight has taught us that housing market boom and bust has not only been driven by a lack of housing supply, but also injudicious access to credit.
This summer, the housing sector should be locked in debate about mortgages ahead of an expected Financial Services Authority consultation in September.
It follows the Turner Review, which examined the causes of the credit crunch, proffering various recommendations to help stabilise the international financial system. But the subject of mortgage access received a rather neutral stance.
A period to reflect is welcome, but what has surprised me is the lack of ensuing debate. Clearly, any tighter regulation of access to mortgages may have a big impact on all three housing sectors. For example, in the private rented sector increased regulation of mortgages for owner occupiers could create significant demand for renting. Then again, increased regulation of buy-to-let mortgages could severely limit supply.
Perhaps before constructing any new regulatory regime we need to understand why FSA regulation of mortgages for owner occupation failed to prevent irresponsible lending. Moreover, buy-to-let loans were treated as business loans and so were never the subject of FSA regulation in the first place.
The Turner Review, without passing judgement, sets out some of the possible options for regulating mortgages in future, for example, applying a loan-to-income, or loan-to-value limit.
A better solution, though, may be to follow Canada. There, federal law requires that financial institutions are only allowed to extend conventional mortgages up to 75 per cent of the value of a residential property. For high-ratio mortgages, where the deposit is less than 25 per cent of the value of the property, mortgage insurance is required to protect lenders against borrower default.
Mortgage insurance can be provided by either a government agency or an approved private insurer. The market there is dominated by Canada Mortgage and Housing Corporation, which is wholly owned by the government, but there is also at least one private sector provider and all insurance providers’ financial obligations carry an explicit government guarantee.
The Canadian system not only maintains access for those who would find it otherwise difficult to enter the mortgage market, but also forces more due diligence into the lending process, because the eligibility criteria for mortgage insurance tests the borrower’s ability to service not only the mortgage, but their other debts.
Clearly, not everyone will ever be able to access mortgage finance and a large part of the British Property Federation’s work is pushing an attractive private rental alternative.
However, with finance flowing into the housing sector likely to be more severely limited in future, I would argue the debate on mortgage provision should not just be about future regulation. Instead, like Canada, we should continue to facilitate access through sensible steps that expand access while better managing risk. Let the debate ensue.
Ian Fletcher is director for residential policy at the British Property Federation
