Bank of England introduces stricter mortgage rules in bid to cool market
The Bank of England has moved to put curbs on riskier mortgage lending with a new cap on home loans and stronger checks to make sure borrowers can afford their repayments. Experts described the announcements as an insurance policy to prevent the housing market from overheating at some point in the future rather than a fire extinguisher to put out all the flames of activity now.
The bank's Financial Policy Committee (FPC) said that loans of 4.5 times a borrower's income or higher should account for no more than 15% of new mortgages issued by lenders.
The bank also said that lenders should apply a new "stress test" ensuring that borrowers can keep up their mortgage repayments in the event of a rise of up to 3% in interest rates over the first five years of the loan.
Figures from the Council of Mortgage Lenders show that across the UK, 9% of new home loans are for 4.5 times income or more, while this figure is 19% in London.
While this indicates that the rules are likely to have a bigger impact on the London market, Matthew Pointon, a property economist at Capital Economics, said that as there were no regional restrictions, the share of such loans being handed out in the capital could rise further without the national limit being breached.
He said: "Essentially, the FPC has designed these measures so that they have no impact if the housing market evolves as they forecast, but will kick in if it accelerates faster than anticipated."
The rules come into force on October 1, but mortgage offers made before the plans come into effect will count towards the new limits.
The Government's UK-wide Help to Buy mortgage guarantee scheme, of which 80% of its users are first-time buyers, is also impacted by the changes.
The Treasury announced a blanket ban will be imposed on any loans being handed out at loan-to-income ratios at and above 4.5 under the Help to Buy mortgage guarantee initiative.