Concern over mortgage lending cap


Rates could rise by year end

Policymakers at the Bank of England were concerned that its plans to impose a new cap on mortgage lending at four and a half times a borrower's income might give the impression that it "endorsed" borrowing at this high level, minutes have shown.

Last week, the Bank's Financial Policy Committee (FPC), which oversees stability, moved to put curbs on riskier mortgage lending by announcing 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 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.

A record published today of the FPC's meeting which led to these recommendations showed that its members were initially divided over how the curbs should be implemented.

Some in the committee thought they should involve setting the loan-to-income threshold at a very high level, but tightly restricting the volume of mortgages that can be handed out at this level to a very small proportion.

But others members thought the policy could be set at a lower loan-to-income multiple, with a greater proportion of lending being allowed above that threshold.

The minutes said one potential benefit from choosing a lower loan-to-income threshold was that "there was a risk that the market might see whatever threshold chosen as one that the committee 'endorsed' as sound from an underwriting perspective".

In the end, the committee decided to set the policy by restricting the flow of mortgage lending at very high loans-to-income.

It also said it will continue to monitor mortgage lending activity to make sure risks do not shift to forms of lending which are not directly covered by the recommendations, such as the buy-to-let market, where there is "scope for financial stability risks to arise from increases in borrower indebtedness".

The minutes said that most lenders are currently lending within the limits of the new rules and are expected to continue doing so. The new rules were described as "insurance" against the risk of there being greater momentum in the housing market than currently anticipated.

The committee said that by acting relatively "cautiously", this reduced the risk of the measures dampening the housing market down to a greater level than expected and impacting on economic expansion more generally.

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

A string of reports have pointed to some sharp rises in property prices in recent months as the economy has recovered and schemes such as Help to Buy have helped to widen the availability of low-deposit mortgages.

But there is also mounting evidence that stricter industry-wide mortgage lending rules which came into force at the end of April are already taking some of the heat out of the market. Under the Mortgage Market Review (MMR), mortgage applicants have to give more detailed accounts of their spending habits to help lenders work out whether or not they can afford a loan.

Writing on the Council of Mortgage Lenders' (CML) website today, Stephen Noakes, CML chairman and director of mortgages at Lloyds Banking Group, said the FPC's moves "are broadly in line with where the industry already is today".

He said: "The FPC is implicitly saying that there is no evidence of a national housing bubble at the moment, but we'd like to take some steps now to ensure we don't see one in the future.

"As such, I feel that the steps are proportionate to the risks that we currently face. The FPC has resisted any political pressure to take tougher action and has put forward proposals that I think most of us in the industry would understand and accept."

The people who affect house prices

The people who affect house prices