Bank of England wins power to cap mortgages

Chancellor announces measure to prevent housing bubble in his annual Mansion House speech

Political Editor

The Bank of England is to be given new powers to cap the size of people's mortgages to prevent a housing bubble, George Osborne has announced.

In his annual Mansion House speech, the Chancellor said the Bank will be able to limit the size of mortgage loans as a share of the borrower's family income or the value of the property.  Speaking at the same event, Mark Carney, the Bank's Governor, hinted that interest rates could rise later this year - sooner than the City of London expects.  He admitted that an increase could push some homebuyers with big mortgages into difficulties.

The Bank will be able to limit the proportion of high loan to income mortgages each bank can lend, or ban all new lending above a specific loan to income ratio. Any caps will apply to every mortgage guaranteed under Government's controversial Help to Buy scheme.

Mr Osborne told his City audience there was  “no immediate cause for alarm” about the housing market but admitted: “There are on the horizon things that should give us some causes for concern.”  If London prices grew at current rates, that would be “too fast for comfort,” and average loan to income ratios had risen to new highs.

The Chancellor declared: “I'm not going to opt for the easy route of some of my recent predecessors: duck the issues, risk a housing boom, and keep my fingers crossed that it won't damage the economy.” He said  Britain must learn “the lessons of the past” and  “act now to insure ourselves against future problems before they can materialise.”

He pledged to build up to another 200,000 homes by changing planning rules. Councils will be required to put in place pre-approved planning permissions on more than 90 per cent of brownfield sites previously used by industry that are suitable for housing. A £5m fund will help local authorities create the first 100 sites. Ministers plan to allow developers to apply directly to central government where councils have not done enough to remove planning obstacles on brownfield sites.

On Friday, Mr Osborne and Boris Johnson, the Mayor of London, will set out plans for new housing zones in London. They will be extended across the country with almost £500m of funding.

Admitting that “much more” needed to be done on housebuilding, Mr Osborne said: “I will not stand by and allow this generation, many of whom have been fortunate enough to own their own home, to say to the next generation: we're pulling up the property ladder behind us.”

The Chancellor did not announce  specific mortgage limits. But Vince Cable, the Liberal Democrat Business Secretary, said he was “appalled” to discover that some lenders were granting mortgages worth five times the buyer's salary. “It is crucially important that the banks don't throw petrol on the fire,” Mr Cable told BBC Radio 4. “Most of us who have been through various housing booms in the past have recognised that a kind of stable level is three or three-and-a-half times.”

Mr Cable's remarks irritated Mr Osborne, who believes mortgage caps should not be decided by politicians but by the Bank's Financial Policy Committee (FPC).

State-backed Lloyds and RBS are already declining mortgages of more than £500,000 where it would be more than four times the buyer's earnings. 

Later this month the FPC will discuss the housing market and could announce some immediate curbs.

Mr Osborne promised that a new law  allowing the Bank to impose caps would be in place before next year's general election. At present, the FPC can  recommend curbing mortgages by loan to value by asking the Prudential Regulatory Authority or the Financial Conduct Authority. The legislation will give the FPC the power of direction, so the two bodies could not challenge its decision.

Mr Carney welcomed  the Chancellor's plans. He said: “The increase in house prices in the past year means we can expect the proportion of high loan-to-income mortgages to grow further in the coming year even if the housing market begins to slow. This is concerning because a durable expansion requires mortgages to be serviceable over their lifetime not just when interest rates are at record lows.”

Ed Balls, the shadow Chancellor, said  Mr Osborne was “behind the curve”, adding: “The danger of the Chancellor's failure to act on housing supply is that we see a premature rise in interest rates to rein in the housing market which ends up hitting millions of families and businesses.”

peopleFrankie Boyle responds to referendum result in characteristically offensive style
Arts and Entertainment
Highs and lows of the cast's careers since 2004
New Articles
i100... with this review
ebooksAn unforgettable anthology of contemporary reportage
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Senior BA - Motor and Home Insurance

£400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...

Market Risk & Control Manager

Up to £100k or £450p/d: Saxton Leigh: My client is a leading commodities tradi...

SQL Developer - Watford/NW London - £320 - £330 p/d - 6 months

£320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...

Head of Audit

To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...

Day In a Page

Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

Despite the result, this is the end of the status quo

Boyd Tonkin on the fall-out from the Scottish referendum
Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

Manolo Blahnik: Flats, Englishness, and Mary Beard

The shoe designer who has been dubbed 'the patron saint of the stiletto'
The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

Scrambled eggs and LSD

Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

'Normcore': Blending in is the new standing out

Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

New leading ladies of dance fight back

How female vocalists are now writing their own hits
Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments
These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam