As house prices have continued to rise the Bank of England have been put under pressure to increase their interest rates in order to avoid another housing bubble. However, the Bank claimed that they were wary of doing this as a large percentage of the UK population are still struggling with the cost of living which means that if interest rates were increased households could start defaulting on their mortgage repayments. This is why the Bank of England’s Financial Policy Committee (FPC) met up this week in order to come up with a way to stem the housing bubble without negatively affecting the UK economy.
As a result, the FPC decided that instead of increasing interest rates they would instead stem the amount of mortgage approvals by only allowing lenders to offer mortgages 4.5 times the amount of a household’s income. Previously, business secretary Vince Cable suggested that the cap should be 3.5 times a household’s income, however the Bank of England governor Mark Carney dismissed this suggestion as he believed it would leave too many people unable to purchase properties. He added that a limit of 3.5 times a household’s income “would have been more consistent with a period of higher interest rates.”
He added: “If we were to put in place something that was a restriction, at three times, we would restrict more than half the mortgages that are currently being underwritten today. That would not just slow the housing market, it would reverse the housing market. It would have implications for the recovery and would do too much, in our judgement. (These steps) will prevent lending getting too far ahead of income growth and they’ll prevent a slide into riskier lending and higher indebtedness that could undermine the economic expansion.”
Industry experts and lenders have already responded positively to the FPC’s decision, with Lloyd Cochrane, head of mortgages at Royal Bank of Scotland, saying: “We recognise the need to manage any signs of pressure in the housing market and welcome the changes the FPC has made today. Though we don’t expect to see any significant impact to our mortgage lending in the short-term, we continue to manage our business carefully.”
Meanwhile, Alan Clarke, head of fixed income strategy at Scotiabank, said: “The measures announced by the Bank in the FSR today represent an insurance policy against overheating, rather than a fire extinguisher to put out the flames.” The Confederation of British Industry (CBI) has also voiced their support over the Bank of England’s new plans, however they have also warned that it needs to go “hand in hand with urgent action” to increase the UK’s housing supply.
CBI’s director general John Cridland added: “It was good to hear the governor recommend measures to mitigate this [the housing bubble]. However, this needs to go hand in hand with urgent action to ramp up the supply of new homes. This will drive growth and create jobs up and down the country.” Mark Clare, chief executive at the Barratt Developments group added: “Housebuilding is a long-term industry, which needs to be underpinned by a sustainable market and prudent mortgage lending is an important part of this.”
It seems as though there has been very little negative response to the Bank of England’s announcement as many believe that this method will help bring more stability to the UK’s housing market. There has currently been no announcement on whether mortgage lending for buy-to-let properties will change, however the criteria for these types of loans are already much more stringent than for personal mortgages.
In general, the Loan to Value (LTV) ratio for landlords is much higher than for personal mortgages, meaning that landlords are required to be financially secure in order to invest in new properties along with afford necessary outgoings such as landlord insurance and letting agent fees.
However, even though most industry experts agree with the Bank of England’s decision, it does mean that a proportion of the population may soon have their mortgage applications denied. Even though this will be initially frustrating for some, in the long term they will probably find that it benefits them as house prices will start to stabilise and they won’t find themselves tied into a mortgage that they cannot realistically afford.