Bank of England plans loan-to-income ratio plan for mortgages

David Harvey our consultant managing the role

The Bank of England is planning to take the heat out of the property market by restricting high loan-to-income mortgage lending.

The importance of the mortgage market for the financial sector and its success and stability has never been more clear than in recent years, where the dubious practices afoot in some countries were compounded to a disastrous extent by the way the unwise lending practices of the US sub-prime market fed into the risky funding of the global wholesale money markets.

While the impact of the credit crunch has abated somewhat, concerns about the stability and sustainability of the financial sector - particularly in mortgage markets - remains. A housing bubble, excessive leveraging of personal finances and the twin threats of negative equity and repossessions when a market correction takes place are major concerns, not least at a time when the UK economy has only just reached the point where output has matched the previous peak in 2008.

The Bank steps in

For these reasons, the Bank of England is keen to prevent a housing bubble, particularly as house prices soar in London and the south-east .

In the past, much was made of the high loan-to-value mortgages that were available until the credit crunch - at which point he opposite scenario unfolded. Now, however, the Financial Policy Committee has recommended to the Financial Conduct Authority that lenders should not be allowed to issue more than 15 per cent of their residential mortgages at loan-to-income ratios exceeding 4.5 times income, assuming a base rate of three per cent.

Mortgage application criteria has already been tightened, but this measure is seeking to go further by ensuring buyers are not over-extending themselves. It could also curb prices, as the increased difficulty of borrowing large amounts could force sellers to lower their asking prices in order to divest their properties.

The Bank of England will now consult on the plans, with responses being accepted until August 31st and the new rules coming into force on October 1st. 

The industry responds

The measure is intended to maintain stability in the property market, mortgage lending sector and wider economy, but the response has been mixed.

Speaking in favour of the move is the Council of Mortgage Lenders. Its director general Paul Smee "will clearly ensure resilience to shocks". He said it is likely to do more to impact on the London market - where 19 per cent of mortgages are over 4.5 times income, compared with the national figure of nine per cent. 

That, of course, may be a highly desirable aspect of the measure, as it could help avoid an overheating of the London market and prevent a wave of householders struggling to keep up repayments in the capital.

Head of mortgage policy at the Building Societies Association Paul Broadhead was less keen on the measure. He warned: "This type of blunt instrument is untested in the UK market and there is a risk of unintended consequences, particularly for first time buyers." Mr Broadhead expressed concern that this group, which by nature tends to have to borrow at higher loan-to-value levels, might be "pushed towards more expensive credit".

Both experts also emphasised that increased housing construction to bolster supply should still be the top priority, but that is not in the Bank of England's remit. Keeping lenders on a tight leash is, however - and officials at Threadneedle Street clearly intend to tug hard. 

11/04/16
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