The Bank of England, the central bank of the UK, reported on Thursday that it made recommendations for the implementation of loan-to-income ratio limit for mortgage lending at its June meeting, in order to help maintain stability in the financial system.
Recommendations designed to cool the housing market boom were made by the BoE’s Financial Policy Committee (FPC) to the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). They advise that the PRA and the FCA should ensure that mortgage lenders do not extend more than 15% of their total number of new residential mortgages at loan to income ratios at or greater than 4.5. The FPC’s recommendation applies to all lenders that provide residential mortgage lending in excess of GBP100 million per annum and is one of two made by the FPC that are intended to capture macro prudential risks associated with excessive household indebtedness.
Lenders will also be asked to test whether a 3% rise in base rates over the first five years of a mortgage would affect an applicant’s ability to repay their loans, however mortgage lenders are advised continue to apply whatever criteria they feel are appropriate and commensurate with their risk appetite when taking individual lending decisions. The PRA would not expect firms to vary their lending practices as a result of this policy unless they find that they would otherwise be in breach of the limit. This limit will not apply to firms which report less than GBP100m of new mortgage lending annually, which will be assessed on a rolling basis.
A consultation paper has been published by PRA Board, which sets out proposals on how the BoE’s recommendation will be implemented and will be open for comments until 31 August 2014. The final rules will be effective on 1 October 2014.
Independent consultancy, the Centre for Economics and Business Research ltd (Cebr) stated that the latest house price data for May show annualised growth of 8.2% and 9.5% on the Halifax and Nationwide measures, respectively. According to Cebr, it is important the Bank of England does not “quash a housing recovery in the rest of the country through becoming too fixated with rising prices in London.” Cebr said it believes that the Government’s Help to Buy scheme has helped keep prices buoyant over the short term and the scheme is beginning to contribute to stimulating house-building.