Bank of England cracks down on mortgages
The Bank of England has taken fresh steps to prevent people from taking on unaffordable mortgages.
In a package of "proportionate" measures designed to cool the market without derailing the recovery, the Financial Policy Committee (FPC), which is in charge of financial stability, recommended that:
• No more than 15pc of new mortgages are extended to people borrowing more than 4.5 times their income.
• Banks "stress test" borrowers' ability to repay their loans if interest rates were 3pc higher than the level at the time their loan was approved.
• Chancellor George Osborne also announced that it would stop any new loans larger than 4.5 times income from being issued to borrowers under the mortgage guarantee element of Help to Buy.
The measures, outlined in the Bank's latest Financial Stability Report, are designed to stop households getting into too much debt.
Mark Carney, the Governor of the Bank of England, stressed that controlling debt, not prices, was the Bank's biggest concern. "it is not the FPC's role to control house prices, nor can it address underlying structural issues related to the supply, he said on Thursday. "[However], prospects for household debts concern us."
Mr Carney noted that while "history shows that the British people do everything to pay their mortgages," this had knock-on effects for the rest of the economy. "That means cutting back deeply on expenditures when the unexpected happens, potentially slowing the economy sharply. That's why recessions that follow periods of rapid growth, like the record one from which the UK is emerging, tend to be deeper and longer lasting."
Currently, one in ten borrowers take out loans worth more than 4.5 times their income. For first time buyers, the proportion is higher. The FSR noted that 12pc of lending to first time buyers over the past twelve months was at an loan-to-income ratio of 4.5 times or more. The FPC also suggested the measures would target the London housing market. Currently one in five loans in the capital is at an LTI ratio at or above 4.5.
Tough affordability rules introduced via the Mortgage Market Review in April already require lenders to stress test borrowers. However, it is currently up to banks to decide what interest rate to apply for the test.
According to Bank projections, the new guidelines, which are open for consultation, will not begin to bite unless "momentum in the housing market continues to build". In its central projection, where house prices rise by 20pc over the next three years, mortgage approvals climb to 90,000 a month, and wages grow by 4pc, the measures will have no impact on the market.
However, if approvals climb to well above 100,000 a month and house prices continue to grow at double digit rates, the Bank said these policies, to be implemented by the Prudential Regulation Authority and Financial Conduct Authority would start to bite.
Mr Carney said Thursday's actions were "graduated" and "proportionate".
These actions will bite if there is sustained momentum in the housing market," he said.
The Bank said these measures were designed to work alongside current Bank stress tests which are designed test lenders' ability to weather a 35pc fall in house prices and an interest rate shock.
Mr Osborne said he "fully supported" the measures announced by the Bank of England on Thursday. “In the years before the Great Recession the failure to [act] cost families dear and took our economy to the brink.
"I want to protect those who own homes, protect those who aspire to own a home, and protect the millions who suffer when boom turns to bust."