Home loans in danger zone

The Financial Services Authority yesterday told mortgage companies to cut back on big loans for first-time buyers and warned that prices in the London area may be in the "danger zone".

It revealed that in recent months more and more mortgages have breached the traditional affordability test of three times a borrower's income.

FSA chairman Howard Davies told a council of mortgage lenders meeting of the government's concern about irresponsible lending at a time when the number of personal loans for cars and holidays is leading to widespread over-indebtedness.

He told them to take more account of potential affordability problems and ordered closer monitoring of high income multiple lending.

Most at risk are home buyers taking out big loans for expensive London homes, he said. "The gap between average London house prices and average prices in the rest of the country is now as large in percentage terms as it was at its peak in the late 1980s."

In 1988 London prices peaked at 1.75 times the national average, but then fell to 1.22 times by 1993.

"I am not in the prediction business ... but clearly one cannot exclude the possibility of a fall in London house prices, which could put very high loan-to-value loans into the danger zone," said Mr Davies.

Halifax said yesterday that its income multiples have stayed relatively stable, and that while prices in London are high, low interest rates make big loans more affordable. A spokesman said: "In the late 1980s Londoners were paying 40% of their salary into a mortgage, but today the figure is 25% as interest rates have come down from 15.4% to 7.74%."