Bank of England asks regulators to act on mortgage lending

The Bank of England's Financial Policy Committee has recommended lending limits and 'stress tests' to prevent potential future debt.

The Bank of England’s Financial Policy Committee (FPC) has recommended that the financial regulators take steps to cap mortgage lending.

In its June Financial Stability Report, the FPC advised the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) to take two steps.

Two-pronged approach

The first is to ensure mortgage lenders who lend over £100 million a year limit high loan-to-income borrowing. Specifically, the FPC recommends that no more than 15% of lenders’ new mortgages should be lent to borrowers who have loan-to-income ratios (the ratio of mortgage to household income) of 4.5 or higher.

The second is that mortgage lenders should conduct a ‘stress test’ when they’re assessing mortgage applications. This should see if borrowers could still afford to make their repayments if the Bank of England Base Rate was to rise by three percentage points (so, for example, rising from 1% to 4%) during the first five years of the mortgage.

The Council of Mortgage Lenders says many lenders are already stress testing whether people could afford mortgage repayments if rates rose by between 2.5-3 percentage points. These stress tests were introduced as part of the Mortgage Market Review back in April and this recommendation just seems to be a duplication of what's already in place.

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'Prudent' steps

In terms of the loan-to-income limit, the FPC cited a survey from earlier this year which said that 30% of UK households had mortgage debts that exceeded four or more times their income.

These households typically also have amounts of other unsecured debt such as credit cards and personal loans too.

The FPC sees the effects of a potential rise in interest rates for these households not as an “immediate threat to financial stability”. But it feels its recommendations are “prudent”.

However, it also appears to be an effort to potentially cool London house prices, which are racing ahead of the rest of the UK's. The Council of Mortgage Lenders says, in the first quarter of this year, around 9% of mortgages in the UK as a whole were for 4.5 times or more the borrower’s income. However, in London this figure was 19%.

What happens now

The FPC's loan-to-income limit will apply to completed mortgages. It is set to come into force on 1st October and will include mortgage applications began before that date but completed on or after it.

The PRA is now consulting on exactly how it will be implemented.

Help to Buy capped

Separately, the Treasury has announced that no new loans at or above 4.5 times borrowers’ income can be included in the Help to Buy mortgage guarantee scheme. It will consult lenders on how to implement this.

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More on mortgages and property:

Seven reasons mortgage lenders turn you down

The mortgages that will see you through a rate rise

Lenders attempt to defuse interest-only mortgage 'timebomb'

Help to Buy figures suggest scheme most useful outside of London