Financial Stability Report caps future mortgage income multiples

by Neil Patterson

11:54 AM, 26th June 2014
About 5 years ago

Financial Stability Report caps future mortgage income multiples

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Financial Stability Report caps future mortgage income multiples

Bank of EnglandThe Bank of England’s Governor, Mark Carney has today held a press conference to outline new plans to stabilise  the housing market under the Financial Stability Report.

The housing market is the biggest single domestic risk to the UK’s economy, and the Bank of England is seeking to encourage long term price stability. Mr Carney was keen to stress that there is no imminent threat, but household over indebtedness due to rising house prices could threaten disposable income/spending power and hence economic recovery. This is why the last recession was so deep and lasted so long.

Current average household debt stands at 140% of income and mortgages account for 80% of this debt being by far and away the largest liability. Mortgages are also the largest single asset class for the UK’s Banks and Building societies.

The Bank of England will therefore:

  • Cap Banks to no more than 15% of their mortgage lending being above 4.5 times income, currently this is 10% so will have no immediate affect on borrowers.
  • Banks must also asses affordability of a new mortgage based on the current rate plus 3% and again many banks already do this under MMR rules.
  • No new Help to Buy loans can be agreed above 4.5 time income

If you have a mortgage agreed yesterday then today it should still be OK under the new rules.

These measures are not designed to have an immediate affect, but are geared to stop any future overheating by limiting borrowing power without needing to increase interest rates.

The Governor said that current Monetary Policy (includes interest rates) does not need to be diverted due to a single sector specific issue. Raising interest rates to curb borrowing would only hurt household spending and hence slow the economy. This way we avoid economically the tail wagging the dog.



Comments

Neil Patterson

12:50 PM, 26th June 2014
About 5 years ago

PS The percentage of loans over 4.5 times income in London is however 19%, so this will slow down some borrowing in the capital without affecting the rest of the country.

LVW4

12:44 PM, 27th June 2014
About 5 years ago

How will this affect BTL mortgages?

Neil Patterson

13:17 PM, 27th June 2014
About 5 years ago

Reply to the comment left by "Lou Valdini" at "27/06/2014 - 12:44":

The cost and availability of BTL mortgages are affected by a great many factors.

However in isolation being able to lend less on residential mortgages may switch more funds over to BTL and make it a little more competitive.

The big news for me is that the Bank of England now have tools to tackle the Housing market in isolation without damaging the whole economy.

I very much like Mark Carney's tail wagging the dog analogy, but then I must declare myself a bit of a fan.

LVW4

14:31 PM, 27th June 2014
About 5 years ago

Reply to the comment left by "Neil Patterson" at "27/06/2014 - 13:17":

I agree about Carney. Too many people making uninformed knee-jerk comments. If his actions can cool the residential housing market, and the Government continues improving the economy and reducing benefits and fraud, we should get a Conservative Government next year. However, I was amazed at the recent survey showing 'Red Ed' and his policies languishing, while the Labour party was still at 38%. Remove the leader and policies, what else do these people have to be happy about with Labour?

Neil Patterson

14:45 PM, 27th June 2014
About 5 years ago

Reply to the comment left by "Lou Valdini" at "27/06/2014 - 14:31":

Without wishing to get into a party debate, at a guess 90% plus of the population understand very little about economics.

Therefore, as you only need to appeal to more voters than the next party why not just say whatever sounds popular !!!

Neil Patterson

15:16 PM, 27th June 2014
About 5 years ago

In a Radio interview today Mark Carney said he thought the new "Norm" for interest rates assuming the economy is performing well would be about 2.5% and could be some time in 2017.

This is down from previous suggestions that the new norm would be 3%.

We are indeed in a very different world now compared to pre 2008 !!

Denise G

8:29 AM, 28th June 2014
About 5 years ago

Reply to the comment left by "Lou Valdini" at "27/06/2014 - 14:31":

well hopefully a Labour government would undo some of the crap the coalition (or at least Michael Gove their completely unmonitored loose cannon) have piled onto education - not to mention GIVING AWAY most of OUR schools to big businesses with not the slightest interest in children or education only profit

Sustainer -

9:43 AM, 28th June 2014
About 5 years ago

Interestingly, the 4.5x limit will only apply to the high street banks and the larger building societies. The smaller building societies are not affected by the income multiple limit, although they will still be applying the normal affordability tests.

philip allen

10:51 AM, 28th June 2014
About 5 years ago

Reply to Denise D.

And what does that have to do with landlording or, indeed, Property 118? You don't work for Shelter, do you? The coalition are making a very good fist of undoing the damage wrought during 13 years of government that had no clue of economics.

Denise G

10:59 AM, 28th June 2014
About 5 years ago

I was simply answering Lou's question 'Remove the leader and policies, what else do these people have to be happy about with Labour?'

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