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High loan-to-value mortgage lending reaching pre-crisis highs

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14/06/2019
The Bank of England has highlighted that mortgage lending at higher loan to values (LTVs) is approaching pre-financial crisis highs and that banks have a real appetite to lend.

However, it appears the central bank is not overly concerned by this, noting that consumers are far less keen to borrow and that mortgage debt is growing no faster than the overall economy.

Bank of England executive director for financial stability, strategy and risk Alex Brazier added that it would take a significant interest rate shock to push a substantial number of households into trouble for making their mortgage payments.

Easy mortgage credit conditions

Speaking at the University of Warwick, Brazier said: “Although banks have a real appetite to lend, households don’t have the appetite to borrow. Credit conditions in the mortgage market are easy and mortgage pricing competitive.

“The share of new mortgage lending at loan-to-value ratios above 90 per cent is approaching pre-crisis highs as the price of such lending falls relative to that on lower LTV mortgage lending. And yet, mortgage debt is growing no faster than the economy as a whole.

“Of course, the level of household debt is high. But the share of households with very high debt burdens is in fact very low.

He added: “In a low mortgage interest rate environment, only around one per cent of households face debt servicing costs of more than 40 per cent of their pre-tax income.

“It would take a large and sudden rise in interest rates – of up to 300 basis points – to take that fraction of households to around its historic average.”

Economic vulnerability

Brazier also noted that the underlying level of economic vulnerability has returned to a standard level “after a long period in the aftermath of the financial crisis in which it was subdued as debt levels fell back”.

“That’s consistent with the Financial Policy Committee’s judgement that the degree of underlying economic vulnerability is at a standard level,” he continued.

“That judgement drives our assessment of how resilient the financial system needs to be, in particular how large should be the buffers of capital banks run with.”

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