Bank of England imposes first limits on size of UK mortgages

LONDON (Reuters) - The Bank of England imposed its first limits on how much most people can borrow to buy a home on Thursday, in a bid to stem increasing levels of debt and rapidly rising house prices.

Pedestrians walk past the Bank of England in the City of London May 15, 2014. REUTERS/Luke MacGregor

The move makes Britain the biggest economy to date to impose mortgage lending curbs as it tries to stop a repeat of the type of housing bubble seen in the United States and other countries before a 2007 bust that triggered the global financial crisis.

Immediate questions were raised as to whether the measures were tough enough, however, and shares in housebuilders jumped more than 5 percent on relief the moves were not more stringent.

Some form of action to cool double-digit price growth in the housing market had been widely anticipated, and the Bank said more would be done if Thursday’s moves prove insufficient.

Sterling rose towards a six-year high on the prospect that the central bank will ultimately have to raise interest rates.

The BoE’s Financial Policy Committee said that from October, it would only allow 15 percent of new mortgages to be at multiples higher than 4.5 times a borrower’s income, and that all lending would be subject to extra affordability checks.

“(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,” BoE Governor Mark Carney told a news conference presenting the measures.

Britain’s housing market has rebounded sharply following the financial crisis, thanks to record-low interest rates, falling unemployment and government-sponsored credit schemes.

But policymakers have become increasingly concerned about momentum in the housing market, with prices growing at around 10 percent annually in Britain and at nearly double that rate in London, where cash buyers from abroad are also fuelling demand.

Late last year the BoE made mortgage lending ineligible for a loan subsidy scheme. Revamped affordability tests which came into effect in April are also starting to drag on lending.

But the British Bankers’ Association said the new loan cap would not have a big impact on its members’ current lending, though it could limit future house price growth.

Around 10 percent of current lending is at a loan-to-income ratio above 4.5. That rises to around 20 percent in London, but few lenders focus just on the capital so most can offset higher-risk lending there with less risky lending elsewhere.

“I don’t think it will bite on the economy in the short term but it’s a backstop that’s been put in place,” said BBA chief economist Richard Woolhouse.


Carney described the measures as a “firebreak” which he did not expect to have a significant impact until next year and which were designed to allow weak wage growth to catch up with past house price rises.

“If that wage growth doesn’t come through ... the cap would bite more quickly and it would (have) consequences for prices.”

He stressed that it was debt levels not price rises that were the main target of the measures imposed by the BoE’s watchdog on financial stability. “We don’t target house prices. The question is indebtedness.”

He said the measures would not affect the central bank’s decisions on interest rates, which many in the markets think will start to rise by the end of the year.

“They’re less likely to have implications for the path of monetary policy which currently anticipates limited and gradual rate rises over the forecast horizon,” Carney said.

British government bond prices fell after this comment and expectations for an early rate rise increased slightly.

“There were some people in the market either expecting measures that were a little tougher, or who had thought that by implementing the FPC measures the (BoE) could afford to take its time in assessing ... rates,” said Marc Ostwald, strategist at Monument Securities.


The Bank’s move comes less than two weeks after finance minister George Osborne said he would give the BoE full legal powers to limit mortgage lending, something seen as giving the central bank political cover to impose tougher measures.

The latest steps are unlikely to limit many people’s ability to buy a home in the run-up to a national election in May 2015.

Osborne welcomed the new rules, and said no loans under the government’s Help to Buy scheme - which guarantees high loan-to-value mortgages - would be issued at an LTI ratio above 4.5.

Fewer than 5 percent of Help to Buy mortgages currently are issued for ratios above 4.5.

Carney has stressed in the past that the only way ultimately to improve stretched housing affordability in Britain is to build more homes - something the opposition Labour Party has criticised Osborne’s Conservative coalition for failing to do. He has also said the Bank has no power to stop the cash buyers helping to fuel sharp price rises, especially in London.

The FPC also recommended that affordability tests introduced in April should be toughened. Borrowers will from Thursday have to show they can repay the home loan even if interest rates rise 3 percent, compared with at least 1 percent previously.

Carney said the FPC was ready to take further steps if lenders appeared to be breaking the spirit of the rules and allowing credit standards to deteriorate.

“This is the limits of our tolerance and that’s why there is a cap in place. We will evaluate, if we need to recalibrate, we will,” Carney said.

But economists judged the measures to be relatively mild.

“The steps announced by the Financial Policy Committee (FPC) today ... are likely to slow down modestly the housing market without derailing it,” said Christian Schulz, senior economist at German bank Berenberg.

Writing by David Milliken, additional reporting by Matt Scuffham, Andy Bruce and UK companies team; Editing by Catherine Evans