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Bank of England proposes cap on mortgage lending

Joanna Faith
Written By:
Joanna Faith
Posted:
Updated:
26/06/2014

The Bank of England has today announced plans to cool the UK housing market, including a loan-to-income cap on mortgage lenders.

Under the proposals, no more than 15% of loans issued by a lender should exceed 4.5 times a borrower’s income.

Lenders will also have to assess whether borrowers could still afford their mortgage if the Bank Rate rose to 3 percentage points higher than at the origination of the loan.

The recommendations, which are aimed at the Prudential Regulation Authority and the Financial Conduct Authority, are set to come into force on 1 October 2014.

A consultation period will take place between now and 31 August.

The Bank’s Financial Policy Committee (FPC) said the new rules would prevent “excessive household indebtedness” and lenders should continue to apply whatever criteria they feel are appropriate to their risk appetite when taking individual lending decisions.

The recommendation applies to all lenders which extend residential mortgage lending in excess of £100m per year.

While the new rules will not come into force until 1 October, mortgage offers made or decisions in principle taken before the proposed rule comes into effect but which complete after 1 October 2014 will count towards the limit.

RBS and Lloyds Banking Group have already introduced a four times loan-to-income cap and maximum term of 30 years for all mortgage loans worth more than £500,000.

Commenting on the Bank of England proposals, Jonathan Samuels, CEO of Dragonfly Property Finance, said “the jury is out” on whether they will cool the property market down in any material way.

He said: “They’re a start but they may, with the benefit of hindsight, prove to be insufficient.

“There are caps, limitations and new affordability rules but they’re arguably limited in their effect.

“The Bank seems confident that household indebtedness at present doesn’t pose a threat to financial stability. This, to an extent, is the great unknown as we will only know the true threat once rates actually begin to rise.

“Testing people’s ability to cope with loan repayments at a rate 3% higher than at the origination of the loan is a sensible idea, as the interest rate up-cycle will pose a challenge to homeowners around the UK.

“Overall, it’s a mixed bag but then we’ve come to expect that from the Bank of England of late.”

The Treasury has also today announced that no new loans at or above 4.5 times borrowers’ income can be included in the Help to Buy mortgage guarantee scheme.