Bank of England mortgage lending cap attempts to stop boom

Bank of England announced a new mortgage lending cap yesterday, with the hope that the rule would cool down the housing market if credit became too frenzied.

Governor Mark Carney revealed the rule, which will put a ceiling on banks’ riskier mortgage lending. The financial policy committee (FPC) decision means that no more than 15 per cent of any single institution’s new house purchase lending can be at a loan to income (LTI) ratio of 4.5 or more.

Currently, 11 per cent of mortgage lending is for such large loans, but the proportion has been steadily climbing upwards as credit markets have recovered – exacerbated by stagnant wages and rising house prices.

“These actions will bite if there is sustained momentum in the housing market over the coming years,” said Carney.

The governor added: “Because it is acting early, the FPC can take graduated and proportionate steps to reduce the risk of more drastic action being required later on.”

But some analysts disagreed: “We always had our doubts about how effective macroprudential tools alone would be. But even those who were more optimistic are likely to have been disappointed by today’s announcement,” said an analyst at Fathom Consulting.

The rule would likely not have helped to fend off the last financial crisis, since the proportion of lending at an LTI ratio of 4.5 or over was below 10 per cent before the 2008 market crash.

London has seen the largest increase in the proportion of mortgages worth over 4.5 times the borrower’s income – rising from below 10 per cent at the market’s nadir at the end of 2008 to 22 per cent today, along with rapid price growth.

“To the extent that London prices continue to rise sharply in response to foreign cash buyers and lack of supply, however, one consequence of this policy could be to restrict domestic buyers and have little impact on rising prices,” said Deutsche Bank’s George Buckley.

“In the event of continued house price rises, London first-time buyers are likely to be the first to be stopped out,” he added.

The Bank also instructed lenders to assess whether borrowers could afford their mortgage repayments if the Bank’s benchmark interest rate was raised by three percentage points – which would currently bring it to 3.5 per cent.

Shares in major UK house builders surged in price as the news was announced: Barratt Developments shares rose 4.79 per cent during the day, ending at 362.9p.

Similarly, shares in Persimmon jumped by five per cent to 1,259p and Travis Perkins shares saw a 2.72 per cent boost to 1,624p.

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