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Mortgage Cap?

June 18th 2014
By: Melanie Hollidge

Whilst Chancellor George Osborne has planned to give the Bank of England the power to enforce a cap on home loans which are related to income or to the value of the house, mortgage lenders have said that a ‘cap’ on the size of mortgage loans is not likely to be the first thing they do to cool the housing market.  At the moment the Bank can advise on a cap but they can’t impose it.

Affordability tests are a much bigger factor for people trying to buy a home.  The Bank currently has restrictive powers in place to make sure that banks have certain levels of capital, preventing a return to the unhindered mortgage lending which we saw before the financial crisis.

The cap was declared soon after Business Secretary Vince Cable was quoted as saying he was “appalled” that some banks had been lending five times a mortgage applicant’s income, suggesting that a “stable level” was up to 3.5 times.

However, the Council of Mortgage Lenders (CML) has said that there is a difference between the Bank giving the power to cap the loan-to-income level and the banks choosing to use it.  “It would not be the first tool in the toolbox to be used,” it said.

Lord Lawson, former Conservative Chancellor, said it could be more of a backstop – he told the BBC that he thought it would be a “reserve power” and was not likely to be enforced.  It is unlikely that it would make it more difficult to secure a mortgage, but the cost of a mortgage could be expected to rise if the interest rates rise.

During his speech, George Osborne said that the Bank’s Financial Policy Committee would have the new capping power before the end of this Parliament.  'I want to make sure that the Bank of England has all the weapons it needs to guard against risks in the housing market,' he said.

Instead of purely relying on an applicant’s income, lenders must also look carefully at their expenditure following the intervention of the regulator as they now have to face strict mortgage affordability rules.  The lenders must also check that borrowers can cope with rising rates.

Commentators have indicated that the key to preventing house price booms was to build more homes.  In George Osborne’s speech, he announced reforms to planning laws specifically designed to increase the supply of housing. These should provide permission for up to 200,000 new homes according to the government.

He subsequently announced plans for an 'urban planning revolution' which will then see councils forced to pre-approve brownfield sites for housing developments.