The Financial Policy Committee (FPC) announced this morning that additional caps would be placed on mortgage lending in order to "insure against potential risks to financial stability" – in essence, to cool what many are calling an overheating housing market, after widespread concern that prices are rising too rapidly.
The additional restrictions, implemented to ensure the market doesn't return to a pre-recession boom and bust situation, include making recently-implemented affordability checks even stricter by ensuring borrowers could afford their mortgages if base rate were 3% higher than its current level, and the big one – restricting mortgage lending to loan-to-income (LTI) ratios of no more than 4.5.
"The recovery in the UK housing market has been associated with a marked rise in the share of mortgages extended at high loan to income multiples," it said in a statement, explaining the reasons behind this latest measure. "At higher levels of indebtedness, households are more likely to encounter payment difficulties in the face of shocks to income and interest rates."
So, the cap has been designed to ensure borrowers don't take on more debt than they can reasonably afford, and means that from now on no more than 15% of a lender's mortgages will be able to exceed the 4.5 LTI ratio – and none at all for mortgages under the Help to Buy mortgage guarantee scheme. For borrowers, this would mean that if your income was £25,000 per year, for example, the maximum amount you'd be able to get as a mortgage is £112,500 (or 4.5 times your salary). The LTI limit applies to both joint and individual applications, however, so if you applied for a mortgage with a partner their salary would be incorporated into the calculation too.
The move has come after some mortgage providers have implemented their own lending caps independently, namely to address the inflationary pressures of London, and it could well have the desired effect. Figures from the Council of Mortgage Lenders (CML) show that just 9% of new mortgages are at income multiples of 4.5 and above, but this rises to 19% in the London market. As such, "limiting 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", said Paul Smee of the CML.
So it could well prove beneficial, potentially helping to cool some of the demand in the capital and ensuring household debt levels won't become excessive, and ideally it won't have a negative impact on the majority of buyers. It shouldn't pose too many difficulties for those utilising the mortgage guarantee scheme either – according to official figures, the typical home bought through the scheme is worth around £150,000, well below the UK average of £260,000, at an income multiple of 3.1x salary. Nor is it a significant factor behind rising house prices, as mortgages supported by the scheme account for just 1.3% of total mortgage lending.
"The Bank is very clear that it does not see behaviour in the mortgage market as an imminent threat to stability - but it wants to act pre-emptively to be sure that a creep towards higher indebtedness does not store up problems for the future. This is not a story about current irresponsible lending," added Paul Smee, with the measures unlikely to curb rising house prices in the short-term – but what they will do is prevent a return to previous bad practice.
Ultimately, "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", concluded Paul, and ideally it's this that will be addressed next.
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