Bank of England announces cap on mortgage levels

Posted 26 June 2014

The Bank of England has proposed a cap on the proportion of home loans that can be lent at high multiples of household income.

Announcing the proposals, governor Mark Carney said he believed the housing market represented a threat to the UK's economic stability. Under the new proposals, lenders will not be allowed to approve any more than 15% of residential mortgages at above 4.5 times the income of the borrower.

In an attempt to further cool the housing market, affordability checks on borrowers will also be strengthened, a significant move given the tighter criteria brought in only recently in the Mortgage Market Review (MMR).

Ahead of the expected increase in interest rates, which many experts believe could happen as early as this autumn, the BofE said lenders should apply an 'interest rate stress test' to ensure borrowers would be able to keep up their mortgage repayments should the base rate reach 3%. The current base rate has been at a historical low of 0.5% for five years. 

Speaking on the publication of the Financial Stability Report, governor Mark Carney said: "This is the limit of our tolerance [on rising debt] and that's why there is a cap in place". 

The proposal comes on the day that housing minister Kris Hopkins announced that the Help to Buy scheme had created 35,000 new homeowners. The BofE does not expect the new income cap to shut out first-time buyers, but has stressed that if wages don't rise as quickly as expected, some prospective first-time buyers could see themselves struggling to get on to the ladder. 

Reacting to the proposals, Paul Smee, director general of the Council of Mortgage Lenders, said: "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 is likely to impact the London market more than elsewhere. Nationally, 9% of new loans are at 4.5 times income or more, but the figure is 19% in London."

"It is important not to confuse these measures with wider housing policy, for which the Bank is not responsible. Additional housing supply is the main way of relieving affordability pressure and household indebtedness attributable to mortgage borrowing over the long term."

The announcement has resulted in shares in FTSE100 housebuilders rising rapidly, with Persimmon jumping 4.2% and Barratt gaining 3.8%. 



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