Change in lending criteria for City workers will hit the property market hard Tuesday, September 30, 2008
Salaries tend to represent a minority of the total compensation received by City workers, with the bulk coming from bonuses. The latter can be several times as large as the salary component.
Historically, bonuses have been a fairly reliable element of income with the result that mortgage lenders tended to include them for the purposes of assessing a person's mortgage capacity. However, the current chaos has prompted an apparent reversal of this policy by lenders who [rightly] consider that bonuses can no longer be assured and henceforth only salaries will be counted in the calculation.
This will dramatically reduce the ability of City workers to borrow. Setting aside any revulsion/envy you may have at seeing such figures, take the example of a banker earning a salary of £100,000 with a bonus of £300,000. Previously, they may have been able to borrow £1.2m, various things being considered. Now the same banker may be limited to £300,000.
Whilst this doesn't affect anyone in a property already, it will effectively stop them from moving or re-mortgaging, since the new policy would be used to calculate the mortgage limit on a new mortgage/property. At a stroke, the purchasing power of City workers, which has undoubtedly contributed to the property bubble, has been slashed. This will feed directly into the property market and push down prices at the top end of the market, by choking off demand.