Bank of England Has New Powers to Cap Size of Mortgages

The annual speech made by Chancellor George Osborne to the Mansion House has highlighted new powers granted to the Bank of England. These powers focused on the ability to limit the size of mortgage people could apply for in the future. How will the limits be imposed? According to the information gleaned from the speech, the limits would either be related to the total income brought in by the family applying for the mortgage, or according to house values. This would reduce the risks associated with mortgage values that are too high either in relation to household income or to the value of the property itself. Preventing a new housing crisis There is still much concern over the potential for people to borrow much more than they can afford to buy their own property. Business Secretary Vince Cable has stated that some banks have been found to lend as much as five times the amount an individual was earning. For example someone on £40,000 a year could be lent as much as £200,000 to buy a property. This may be affordable on todays low interest rates but it does not allow for a cushion if (and when) rates should rise. Acting against future risks This was the statement made by the Chancellor when making his Mansion House speech. He is clearly aware that the potential for rising interest rates may send the recovery off course. The housing market is getting stronger at present, although some experts are concerned about whether rising house prices are a danger to the current situation. As prices rise it means people either have to borrow more or wait things out until they start to fall again, or else hope that more properties are built to expand the available marketplace. With rising interest rates not far off there are many elements in play that have a bearing on the current situation. Limits on how much can be borrowed as a multiple of earnings A set limit could be imposed in this area as seen above, and it may be at an appropriate time too. The loan to income ratio is higher now than ever before, reaching 3.83 in the London area, according to information from the Council of Mortgage Lenders. This type of information was described by Chancellor Osborne as being among the causes for concern. He went on to say that while some of his predecessors had ignored issues such as these, he was determined not to do so. While the results may be painful now, they will hopefully prevent more people running into financial difficulties later on. While the Bank of England wont necessarily act on these new powers straightaway, it will assess the housing market situation on a continual basis to see whether the powers are justified to use at any point. With the loan to income ratio climbing this high already, it could well be the BoE does exercise its new powers before too long.

Published on 15 June 2014

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