The Bank of England has stepped in to cool the housing market with a warning to lenders to prevent a build-up of risky, high value loan to income mortgages.
The Bank’s Financial Policy Committee (FPC) has said loans of 4.5 times a borrower’s income or higher should account for no more than 15 per cent of new mortgages issued by lenders.
It said also that lenders should apply a new “interest rate stress test” ensuring that borrowers can keep up their mortgage repayments in the event of a rise of up to three per cent in interest rates.
The Bank said in its latest six-monthly financial stability report: “The recovery in the UK market has been associated with a marked rise in the share of mortgages extended at high loan to income multiples.
“At high levels of indebtedness, households are more likely to encounter payment difficulties in the face of shocks to income and interest rates.
“This could pose direct risks to the resilience of the UK banking system and indirect risks via its impact on economic stability.”
The report said the FPC does not believe household indebtedness posed “an imminent threat” but said that it wanted to ensure against risk of a further significant rise in the number of highly indebted households.
Speaking at a press conference, Bank governor Mark Carney sad that the Bank is focused on turning the economic recovery into a “durable expansion”.
He said: “The legacy of high indebtedness and structural imbalances mean that there are financial stability risks that if left unchecked could undermine the durability of that expansion. And the biggest risks relate to the housing market.
“The prospects for household indebtedness concern us. Although UK households have made progress in repairing their balance sheets, they start at a vulnerable position, with debt at 140 per cent of their disposable income.”
But he said the Bank did not want to shut off high loan-to-income lending entirely adding that 54 per cent of first-time buyer mortgages are at or above the 4.5 times level.