George Osborne wants the Bank to be able to guard against long-term risks in the housing market.
George Osborne is planning to grant new powers to the Bank of England to cap mortgage lending.
Last night, in his fifth annual Mansion House speech, the Chancellor said that although the housing market did not pose an immediate threat to financial stability, it could in the future.
At the moment average loan-to-value (LTV) ratios, or the ratio of of mortgage borrowed against a property's value, for new lending are still well below normal. However, average loan-to-income ratios, or the ratio of mortgage to someone's salary, have risen to new highs, which could pose a long-term risk to the stability of the housing market if people become unable to repay mortgages.
The new powers would mean that, for the first time, the Bank would be able instruct lenders to limit how much is lent as a share of a borrower’s income or as a proportion of the value of the home they want to buy.
The decision on when to act would be left to the Bank’s Financial Policy Committee, the new body in charge of overseeing the health of the UK’s whole financial system.
The Chancellor said the Bank's new powers would be in place by the end of Parliament.
What does this mean for borrowers?
The new powers will mean the Bank’s taskforce can impose caps or ban lending when it believes borrowers are being offered potentially unaffordable mortgages.
The action could take the form of a cap on the number of high loan-to-income or high loan-to-value mortgages each lender can offer, or even a ban on all new lending above a specific loan-to-income or loan-to-value ratio.
The Chancellor said that the Bank should not hesitate to use its new powers if it thinks it necessary to protect financial stability.
What about Help to Buy?
The Chancellor used his speech to further defend the Government’s controversial Help to Buy scheme.
[SPOTLIGHT]The scheme, which helps first-time buyers and existing homeowners get on or move up the property ladder via a Government mortgage guarantee or loan, has been blamed for fuelling house price growth.
But he referred again to figures released last month which show ithe scheme helping lower income families outside London to buy homes priced well below the national average.
However, the Chancellor said that should the Bank of England see fit to take action to cap lending in the system, Help to Buy mortgages would get the same treatment.
Other reforms
The Chancellor also spoke about implementing more robust reforms for financial markets and tackling the long-term challenge of UK housing supply.
On market reform, he announced there would be tough new penalties for market abuse, new powers to regulate exchange, commodity and fixed income markets and a review into the standards of our financial markets, with the findings to be reported in a year’s time.
He also talked about plans to force local authorities to put pre-approved planning permission in place on brownfield sites suitable for housing.
Councils would be responsible for applying for local development orders (LDOs) to ensure the sites are ready for developers to get to work.
The Government will also consult on allowing developers to apply directly to central government where councils have not done enough to remove planning obstacles on brownfield sites.
He dubbed the reforms an ‘urban planning revolution’ which would see 90% of these sites covered with up to 200,000 new homes by 2020.
In order to support this reform the Government will create a £5 million fund to help councils get the first 100 sites pre approved.
More on mortgages:
Help to Buy mortgages explained