The Bank of England has told mortgage lenders to limit the proportion of mortgages at loan to income multiples of 4.5 and above to no more than 15% of their new mortgages.
It has also said that lenders will be required to check their borrowers’ affordability against an assumed Bank rate 3% higher than at origination as a guard against a potential property bubble.
The announcement in its latest Financial Stability Report has been met with concerns that it will affect ordinary mortgagees rather than cash buyers, wealthy overseas buyers and buy to let landlords who are credited with pushing up home prices in London and the South East.
‘The recovery in the UK housing market has been associated with a marked rise in the share of mortgages extended at high loan to income multiples. At higher levels of indebtedness, households are more likely to encounter payment difficulties in the face of shocks to income and interest rates. This could pose direct risks to the resilience of the UK banking system, and indirect risks via its impact on economic stability,’ the report says.
‘While the Financial Policy Committee does not believe that household indebtedness poses an imminent threat to stability, it has agreed that it is prudent to insure against the risk of a marked loosening in underwriting standards and a further significant rise in the number of highly indebted households,’ it adds.
The FPC has recommended that when assessing affordability, mortgage lenders should apply an interest rate stress test that assesses whether borrowers could still afford their mortgages if, at any point over the first five years of the loan the Bank Rate were to be 3% higher than the prevailing rate at origination.
Council of Mortgage Lenders director general Paul Smee said that while the new affordability stress test will clearly ensure resilience to shocks, limiting the level of a lender’s lending to no more than 15% of new mortgages at 4.5 times income or above and none at all for Help to Buy guaranteed loans is likely to impact the London market. He pointed out that nationally, 9% of new loans are at 4.5 times income or more, but the figure is 19% in London.
‘It’s important not to confuse these measures, which are designed to ensure financial and economic stability, with wider housing policy, for which the Bank is not responsible. Additional housing supply to help correct the imbalance between supply and demand is the main way of relieving affordability pressure and household indebtedness attributable to mortgage borrowing over the long term,’ he added.
Peter Williams, executive director of the Intermediary Mortgage Lenders Association (IMLA), said that the mortgage market remains subdued by any historical yardstick and while the FPC is right to voice concerns at any emerging trends which could rock the foundations of financial stability, it would be wrong to assume that rising house prices automatically mean household debts careering out of control.
‘Sweeping caps on mortgage lending would be ill suited to…