Bank curbs riskier mortgage lending



The Bank of England has moved to put curbs on riskier mortgage lending with a new cap on home loans and stronger checks to make sure borrowers can afford their repayments.

Experts described the announcements as an insurance policy to prevent the housing market from overheating at some point in the future rather than a fire extinguisher to put out all the flames of activity now.

The Bank's Financial Policy Committee (FPC) said that loans of 4.5 times a borrower's income or higher should account for no more than 15% of new mortgages issued by lenders.

The Bank also said that lenders should also apply a new "stress test" ensuring that borrowers can keep up their mortgage repayments in the event of a rise of up to 3% in interest rates over the first five years of the loan.

Figures from the Council of Mortgage Lenders (CML) show that nationally, 9% of new home loans are for 4.5 times income or more, while this figure is 19% in London.

While this indicates that the rules are likely to have a bigger impact on the London market, Matthew Pointon, a property economist at Capital Economics, said that as there are no regional restrictions, the share of such loans being handed out in the capital could rise further without the national limit being breached.

He said: "Essentially, the FPC has designed these measures so that they have no impact if the housing market evolves as they forecast, but will kick in if it accelerates faster than anticipated."

The rules come into force on October 1, but mortgage offers made before the plans come into effect will count towards the new limits, meaning that lenders will now be taking them into account.

The Government's UK-wide Help to Buy mortgage guarantee scheme, of which 80% of its users are first-time buyers, is also impacted by the changes.

The Treasury announced a blanket ban will be imposed on any loans at all being handed out at loan-to-income ratios at and above 4.5 under the Help to Buy mortgage guarantee initiative.

More than 95% of the over 7,000 loans handed out so far under the mortgage guarantee scheme have been for loan-to-income ratios of less than 4.5.

Bank governor Mark Carney said the Bank is "taking out insurance" to prevent any future lending mistakes.

But he said the Bank does not want to shut off high loan-to-income lending entirely and 54% of first-time buyer mortgages are at or above the 4.5 times level.

He said this "makes sense" as "future earnings prospects of first-time buyers, who tend to be younger, are greater and they grow into their mortgage".

Concerns about the impact of a potential house price bubble on the wider economic recovery have mounted alongside a string of reports pointing to a strong upswing in property values.

According to Office for National Statistics (ONS) figures, property values across the UK have typically jumped by almost 10% over the last year to reach a new all-time high of £260,000. In London, where competition among buyers has been particularly intense, prices have leapt by 19% over the last 12 months.

But in recent weeks there have also been some signs of a slowdown in activity, which has been put down in part to stricter industry-wide mortgage lending rules which recently came into force and to growing caution among home buyers in the face of the strong price hikes.

House builders' shares were up following the announcements, indicating the planned clampdown is not as severe as some might have expected.

Alan Clarke, head of European fixed income strategy at Scotiabank, said the Bank of England's moves "represent an insurance policy against overheating, rather than a fire extinguisher to put out the flames".

Andrew Montlake, director at broker Coreco, described the moves as "much ado about nothing given the current market conditions".

He said that under the new toughened rules which have already come into force in April under the Mortgage Market Review, lenders already apply "stress tests" to make sure borrowers could still afford their payments when interest rates rise, using rates of about 7%.

He said: "The restrictions on lenders allowing only 15% of their mortgage book to be above 4.5 times income multiples is more of a case of future proofing rather than having any substantial effect now, although those purchasing in London are likely to be affected more quickly."

Martin Beck, senior economic adviser to the EY Item Club, said that the talk coming from the Bank is in itself likely to have a dampening effect on upward house price movement.

He said: "The fact that the FPC has been willing to bare its teeth, highlighting the possibility of further restrictions in the future, should have some effect in dampening the belief held by some that the only direction for house prices is up."

Mr Carney said the Bank does not believe that household debt levels pose an imminent threat to stability and it expects the housing market to slow in about a year's time as incomes start to pick up.

He said: "However, as we've seen time and again how quickly responsible can turn to reckless, creating risks that ultimately derail the UK economy...

"History shows that the British people do everything they can to pay their mortgages. But that means cutting back sharply on expenditures when the unexpected happens, potentially slowing the
economy sharply."

Asked about the impact of the measures on London, Mr Carney said: "Just under two-thirds of the high loan to income lending, in other words lending above four and a half times, today is in London and the South East.

"There is room for some additional lending, but there is this cap that comes into place. Under reasonable risk scenarios, it can become effective within a year."

The people who affect house prices

The people who affect house prices