Mortgage lending curbs expected

Curbs on mortgage lending to make it harder for borrowers to take out riskier home loans are expected to be recommended by the Bank of England tomorrow.

Speculation has been mounting that the Bank's Financial Policy Committee will announce measures to rein in the way some loans are handed out
Speculation has been mounting that the Bank's Financial Policy Committee will announce measures to rein in the way some loans are handed out

Speculation has been mounting that the Bank's Financial Policy Committee (FPC), which oversees stability, will announce measures to rein in the way some loans are handed out, following a string of strong surges in house prices and fears over their impact on the recovering economy.

The Bank has previously dropped hints that it could use some of its tools to calm the market down, with its deputy governor for financial stability, Sir Jon Cunliffe, recently describing the housing market as the "brightest" of the blinking warning lights that the Bank monitors.

House prices have surged by 9.9% over the last year to stand at a new all-time high of £260,000, according to Office for National Statistics (ONS) data.

Earlier this month, Chancellor George Osborne announced plans to hand the Bank beefed-up powers to control the housing market, which will eventually see it able to impose restrictions on the ratio of mortgage loans compared with borrowers' incomes, or compared with the value of their house.

These new powers are expected to be in place by the end of the current Parliament next May. Mr Osborne said that while the housing market does not pose an immediate threat to financial stability, it is important to insure against future problems.

In the meantime, the FPC already has a range of tools which enable it to recommend measures including caps on mortgage loan-to-value and loan-to income ratios to regulators, to head off the threat of a housing bubble.

State-backed lenders Royal Bank of Scotland (RBS) and Lloyds Banking Group recently voluntarily announced new caps on high-value lending, perhaps paving the way for others to follow.

Both lenders have said that people applying to take out a mortgage worth more than £500,000 will see the amount they are allowed to borrow limited to four times their income.

There have also been calls for the Bank to recommend diluting the Government's flagship Help to Buy scheme, which has been criticised for adding to the upward pressure on house prices by creating extra demand in the market without a corresponding upswing in the supply of homes for buyers to choose from.

Recent Government figures have indicated that Help to Buy, which helps aspiring first-time buyers and home movers with 5% deposits, is having only a minimal direct impact on the parts of the UK where house prices have been at their most heated, such as London.

But some experts have said that chopping down the £600,000 maximum purchase price of a property would send out a strong signal to the market and help to calm people's house price expectations.

There are also suggestions that the FPC will look to tweak the "stress tests" used by lenders when weighing up whether someone can afford their mortgage.

Toughened mortgage lending rules came into force at the end of April under the Mortgage Market Review (MMR). The stress tests used under these rules mean that lenders have to apply a higher interest rate to make sure someone could still afford their mortgage payments as and when rates rise.

Signs have emerged that the new MMR rules are already taking some of the strongest heat out of the property market and applying the brakes to lending. Earlier this week, the British Bankers' Association (BBA) reported that mortgage approvals fell back for the fourth month in a row in May.

Matthew Pointon, a p roperty economist at Capital Economics, said: "It will remain harder to qualify for a mortgage."

He said: " Despite the recent slowdown in mortgage lending, we expect the FPC will act to toughen up the interest rate stress test in an effort to bring down loan-to-income ratios ."

Bank governor Mark Carney appeared to play down the prospect of imminent interest rate rises when he appeared before the Treasury Select Committee this week.

Mr Carney had indicated in his recent Mansion House speech that the first interest rate rise may come "sooner than markets currently expect", leading many observers to speculate it could arrive by the end of this year.

Labour's Pat McFadden told him: "It strikes me the Bank is behaving a bit like an unreliable boyfriend - one day hot, one day cold - and the people on the other side of the message are left not really knowing where they stand."