Bank of England announces new curbs on mortgage lending

Bank toughens mortgage affordability tests and calls for cap on new home loans

The Bank of England today announced new curbs on mortgage lending to prevent an explosion of potentially dangerous household debt.

The regulator said that, henceforth, of all the new home loans made by banks, no more than 15 per cent can be at loan to income multiples of 4.5 and above.

Currently just 11 per cent of new mortgages are at such high loan to value multiples - so the move was described by the Bank as "prudent insurance" rather than a rules that would affect the housing market immediately. 

The regulator also instructed banks to apply a more stringent affordability test on all new mortgages. Lenders will have to assess whether borrowers will be able to afford repayments if interest rates were to rise from their present record lows of 0.5 per cent to 3.5 per cent over the next five years.

Under the present rules lenders are testing whether borrowers can withstand a rise in interest rates of 2 to 2.5 percentage points, so the move represents a marginal tightening.

However, the regulator added that the new loan-to-income curbs will not apply to buy-to-let loans made by banks. Remortgages will also be excluded, provided borrowers do not add to the principal debt.

The Bank's Financial Policy Committee said that it does not think household debt poses an "imminent" threat to financial stability but that it was "prudent to insure against a marked loosening in underwriting standards and a further significant rise in the number of highly indebted households". 

Banks report their mortgages quarterly to the regulator and flows will be monitored by the regulator to ensure compliance.

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