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Bank of England warns on growth in risky mortgage lending

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The Bank of England is concerned by pockets of riskier lending, which could prompt further regulatory action to stem the availability of looser credit, minutes from the Financial Policy Committee (FPC)’s meeting earlier this month revealed.

The committee flagged signs of rising risk appetite within mortgage underwriting standards, as well as rapid consumer credit growth and overall household indebtedness, in an assessment of threats to Britain’s financial stability in its March 12 meeting.

The FPC noted that “there had been a gradual loosening in credit conditions in the mortgage market in recent years”.

Spreads on new fixed-rate, owner-occupier mortgages were highlighted as having fallen, with the spread between 90% loan to value (LTV) and 75% LTV mortgage products dropping by 34 basis points since 2016 Q1.

The FPC added this was “unlikely to reflect an improvement in underlying credit quality” and added that the share of lending at high loan to income (LTI) ratios had also increased.

Highest LTV levels well below crisis levels

The share of lending at very high LTV ratios above 95% remained well below pre-crisis levels, but the share of lending at LTV ratios just below this level had recovered from its crisis troughs, the FPC said.

However, policymakers said there was little evidence the easier credit conditions were driving an overall stronger uptake in mortgage borrowing by households.

The FPC said previous policy actions were helping to contain risks from the looser lending, such as the limit on the proportion of mortgages that lenders could give at 4.5 times borrowers’ incomes or higher.

But warned there could be a further clampdown on lending if risks continued to grow.

The minutes said: “If the signs of rising domestic risk appetite became persistent and more generalised, the FPC would consider further how to balance targeted policy action with decisions on the UK countercyclical capital buffer rate.”

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