June 27th, 2014
During his speech to present the Bank of England’s half year assessment of the market yesterday, the Governor of the Bank of England, Mark Carney, introduced new rulings on lending limits that will see a restriction put in place to cap the level of loan to income ratio for mortgage borrowing, in an attempt to prevent the housing market from overheating.
Carney’s argument for introducing the change stems from repeated claims that the housing market is drifting towards potential ruin, with recent statistics showing that house prices across the UK have rapidly increased to the point that the market could collapse under the strain. Much has been made of past mistakes with lending processes being unrestrained and reckless, with the Financial Conduct Authority’s Mortgage Market Review being a direct response. Carney was clear yesterday that in the BOE’s opinion, further measures are required, although these should remain “graduated and proportionate” to the issue in hand.
Carney stated on the matter that, ‘These actions should not restrain current market housing activity … these actions will have minimal impact in the future if the housing market evolves in line with the Bank’s central view.’ He also confirmed that further action would only be taken, ‘if there is sustained momentum in the housing market over the coming years and that’s accompanied by further sharp increases in high loan to income lending.’
The steps mark a turning point in the way that the BOE has been authorised to regulate the markets, since the financial crisis first hit in 2008. New powers attributed to the BOE by the Government allow the body to step in when drastic action is conceivably required to prevent further disasters. The plan, as detailed during Carney’s speech to the financial policy committee yesterday, will enforce a restriction on banks and building societies to only lend up to 15% of their mortgage loans to a borrower requiring four and a half times their income.
While the BOE have confirmed this will not have an instantaneous effect on property prices increasing, especially as the restriction will only begin on 1st October and no lender is currently near the set limit, the decision has been made to particularly reign in the London and South East markets. Prices in these areas have escalated in recent months, to the point where sales figures have dipped for the first time in several years, partly due to the escalating costs to buy, and in part due to the FCA Mortgage Market Review changes effecting underwriting timescales.
Industry reaction to the measures has been accepting, although many feel that the plan will shut out first time buyers, particularly in the South-East. Steve Clements from Contractor Mortgages Made Easy, a contractor mortgage specialist broker, said: ‘Undoubtedly, this is a long term measure, with the expectation being that by putting larger loans out of reach, property prices will need to reduce to allow a sale to be possible. However, most first time buyers struggle with the deposit for a purchase, and are reliant on an increased and flexible lending decision to achieve their goal.
‘Many buyers in the capital are likely to need to consider whether they can afford to live there if mortgage borrowing is not possible.’
Article By: Simon Butler, Senior Mortgage Consultant at Contractor Mortgages Made Easy
Media Contact: Raman Kaur, Public Relations Manager
Tel: 01489 555 080