Bank of England toughens mortgage affordability test

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BankofEngland1 Reuters.

London - The Bank of England sought to put the brakes on Britain's surging housing market on Thursday by announcing a cap on home loans and tougher checks on whether borrowers can repay their mortgages.

The Bank's Financial Policy Committee said that from October, it would only allow 15 percent of new mortgages to be at multiples higher than 4.5 times a borrowers' income.

Britain's housing market has seen a stellar recovery thanks to record-low interest rates, falling unemployment and government-sponsored schemes.

But policymakers have become increasingly concerned about momentum in the housing market, with prices growing at around 10 percent annually in Britain and at nearly double that rate in London where cash buyers from abroad are also fuelling demand.

“(These measures) will prevent lending getting too far ahead of income growth and they'll prevent a slide into riskier lending and higher indebtedness that could undermine the economic expansion over the medium term,” BoE Governor Mark Carney said at a news conference to present the measures.

Share prices in British house building companies rose by more than 5 percent after markets judged the measures were less harsh than feared, and British government bond prices hit a day's low as Carney said the measures would not affect rates.

“They're less likely to have implications for the path of monetary policy which currently anticipates limited and gradual rate rises over the forecast horizon,” he said.

The Council of Mortgage Lenders said the steps were more likely to affect lending in London - where almost a fifth of loans are at loan-to-income ratios above 4.5 - than in the rest of the country, where the cap would affect less than 10 percent of loans.

“Additional housing supply to help correct the imbalance between supply and demand is the main way of relieving affordability pressure and household indebtedness attributable to mortgage borrowing over the long term,” the CML said.

The cap will affect all banks which lend more than 100 million pounds ($170 million) a year, and finance minister George Osborne said the measures will apply to all loans under the government's Help to Buy scheme, which guarantees high loan-to-value mortgages.

The BoE has said it does not aim to curb house prices directly, but instead it is focused on ensuring that lending does not get out of control. It has warned that mortgage conditions appear to be getting more lax.

“This is the limits of our tolerance and that's why there is a cap in place. We will evaluate, if we need to recalibrate, we will,” Carney said.

The FPC also recommended affordability tests introduced in April should be toughened.

Borrowers will from Thursday have to show they can repay the home loan even if interest rates rise 3 percent, compared with at least 1 percent previously.

Interest rates are currently at a record low of 0.5 percent, although markets expect a rise by the end of the year or early next year.

The Bank of England said the immediate impact of the cap would be minimal since most lenders currently lend within this 4.5 times limit and are likely to continue to do so. It said the measure was intended to be an insurance against greater momentum in the housing market.

The move is the latest in a series of efforts by policymakers to cool the housing sector, which have already weighed on mortgage approvals in recent months.

The Bank's Prudential Regulation Authority also said the top eight British banks must maintain a core capital buffer of 7 percent, and a leverage ratio of 3 percent. - Reuters


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