Word on the web: Mortgage lending

The Bank of England’s Financial Policy Committee has announced measures to constrain banks’ ability to make riskier mortgage loans, but what impact will they have?

Avoiding bubble trouble

By October, banks will have to ensure that loans of more than four-and-a-half times a borrower’s income make up no more than 15% of the new mortgages they grant. Lenders are also expected to apply a new ‘interest rate stress test’ to ensure borrowers can keep up their mortgage repayments in the event of a 3% rise in the Bank’s rate.

The measures are designed to reduce the risk of a damaging house price bubble and help prevent a repeat of the 2008 economic crisis, but BBC Economics Editor Robert Peston reckons the measures will have no impact in the short term.

The 15% limit “may sound like a significant constraint on banks’ commercial freedoms,” he says. “But it is unlikely that any of the big banks has ever in the history of banking supplied such a high proportion of high loan-to-income mortgages over any extended period.”

Peston believes the Bank of England has designed the new measures "to limit the dangerous risks it expects banks to be taking in three years’ time”.

Robert Peston column

‘Much ado about nothing’
Peston’s views are echoed by Andrew Mortlake, Director at London-based mortgage provider Coreco, who blogs that “these new measures amount to much ado about nothing, given the current market conditions”.

He points out that under the Mortgage Market Review (MMR), lenders are already stress testing at a rate of around 7%, so the new 3% above current rate level does nothing more than standardise this across the board without having a major effect.

Mortlake describes the measures as “more an act of changing buyer sentiment further rather than a call to arms and is probably a sensible shot across the bows for the future”.
Andrew Mortlake's blog

Difference of opinion

Reuters, meanwhile, claims that Bank of England policymakers differed on how best to stop homebuyers from borrowing too much.

According to the news agency, the record of the meeting at which the new measures were agreed “showed that policymakers had also considered setting a lower ratio as the threshold, but relaxing rules to allow more mortgages above that level”.

The record, adds Reuters, also revealed that although most policymakers agreed a housing shortage was the main driver of house price rises, one policymaker noted that big rises had also taken place in countries without a housing shortage.
Reuters story

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Published: 04 Jul 2014
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