News Column

Mortgage loans to be capped by Bank of England – but why?

June 13, 2014

Jill Treanor Hilary Osborne, theguardian.com



What is George Osborne doing?

The chancellor is saying that he will give the Bank of England the power to cap the size of mortgage loans as a share of a borrower's income or the value of the house.

Why is George Osborne doing this now? Is it because there is a house price bubble?

Several months of headlines about runaway house prices have forced the chancellor into action. According to Nationwide prices have passed their previous peak while other indices are all showing sharp rises. London has been driving the boom, with an average annual price rise of 18%, but there are increasing signs that buyers are having to stretch themselves to buy in other parts of the country too.

The International Monetary Fund has been scrutinising the housing market in the UK and called on the Bank of England to act "early and gradually" to avoid a housing bubble.

Among the concerns of the IMF is that policymakers are also facing the prospect of having to sanction a first rise in interest rates in almost six years a move which could put additional pressure on borrowers who have been enjoying low mortgage rates.

How much are people borrowing at the moment as a proportion of how much they earn?

According to the Council of Mortgage Lenders, first-time buyers are typically borrowing 3.4 times their household income to get on the housing ladder, while movers are taking on loans of just over three times their salary. That's the median so half are borrowing more. And the average disguises big regional differences: in London the median is 3.8 times salary, while in Northern Ireland it is 2.9.

Some borrowers have been taking loans that are more than five times their salary. Around 2.6% of Royal Bank of Scotland's lending in London is at more than five times salary and above 500,000.

Figures from the Bank of England show that in the first three months of 2014 almost 12% of lending was based on four or more times a single income, and 27% was based on three or more times joint earnings.

How much are people borrowing at the moment compared to the value of their homes?

Loan to values the proportion of a property's cost that the borrower takes as a mortgage have been creeping up but remain below the levels seen in the mid-90s and the run-up to the last crash. The median LTV among first-time buyers now stands at 83%. In London, LTVs are lower than the national average because of the monthly cost of repaying a big loan. New buyers in London typically borrow just 75%.

Aren't there already new rules to stop people borrowing too much?

Yes since April banks and building societies have been required to carry out tough checks before they offer mortgages to prevent a return to the reckless lending seen in the run-up to the crash. These involve scrutinising applicants' income and outgoings including in some cases what they spend on evenings out and checking that loans can still be afforded if interest rates rise. However the mortgage market review, as it's called, did not set a limit on income multiples, and borrowers have still been able to borrow high income multiples.

Haven't banks been easing back on lending already?

Lloyds Banking Group was the first to raise the alarm about house prices in London by capping applications for mortgages of more than 500,000 at no more than four times a borrower's salary. RBS followed shortly afterwards.

Who is George Osborne giving the new powers to?

The Financial Policy Committee, was set up by the coalition government in response to the 2008 banking crisis, which in turn exposed a lack of forward thinking by policymakers about the risks to the financial system. It is chaired by the Bank of England governor, Mark Carney and charged with monitoring risks to the financial system and taken steps to remove those risks.

What powers does the FPC have already?

Until now the FPC has been able demand that banks (via their regulators) hold more capital in general and also specifically against three sectors residential loans, commercial property lending and financial institutions. It has also been able to make recommendations about the way banks are lending in terms of the value of mortgages compared to borrowers' income or value of their home. It also monitoring the Help to Buy scheme set up to make it easier to get a home loan.

Does the FPC want this power?

When it was first asked about the tools it would like to able to control the markets two years ago, the committee rejected asking for this power because it felt there needed to be more debate about the way it could intervene in the markets.

What other countries give their regulators such powers?

Last year banks in New Zealand were forced to restrict new lending to customers with small deposits, in a move that made it more difficult to get a mortgage with less than a 20% downpayment on a home. Mark Carney has experience from Canada where he ran the central bank until a year ago and steps were taken to cool the housing market by forcing borrowers to pay off their mortgages over a shorter time scale. Hong Kong, Korea and Singapore are examples of other countries which have taken steps to cool their housing market. In Switzerland, the banks have been forced to hold more capital against mortgages.

How quickly can it use the new power being handed to it by the chancellor?

The next quarterly meeting of the FPC takes place next week. It is scheduled to announce what decisions it has taken on 26 June when there were already expectations that it would take steps to take the some of the heat out of the mortgage market. But it is not expected that it will decide to use the new power to limit the size of a mortgage as a share of a borrower's income or the value of the house yet because policy makers do yet think there is a systemic risk from the housing market.

How did the market get into this state?

After the 2008 banking crisis, the mortgage market came to a halt as confidence dried up, the economy deteriorated and lenders found it difficult to raise the money to pass on to borrowers. A series of measures were introduced to try to get the home loans flowing again. The FPC has already forced the government to modify the funding for lending scheme so that it could no longer support lending for homes and instead be focused on small businesses. The concern of politicians and policy makers is to ensure these are not storing up problems, and creating a new set of problems for the financial system.


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Source: Guardian Web


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