ref="http://www.cityam.com/company/nationwide">Nationwide has announced it is capping all new mortgages at 4.75 times the income of the borrower, and setting a tough new stress test to ward off concerns over interest rate rises.
The bank will impose a new 6.99 per cent stress test, an increase on the existing rate, although a spokesperson would not reveal where the current level is set. The test is designed to protect borrowers should the interest rate rise, to ensure they would be able to continue repaying their loan and prevent homes being repossessed.
The move comes in the wake of other similar caps from high-street banks in the UK, with both RBS and Lloyds setting caps at four times the income of the borrower in recent weeks, on loans above £500,000.
Lenders are under increasing pressure to act as the Bank of England warms up to the idea of raising interest rates.
Advice from the Bank’s financial policy committee (FPC) is thought to be behind recent changes, after it cautioned that lenders should not hold more than 15 per cent of their mortgage lending at a loan to income ratio greater than 4.5.
Currently, only 11 per cent of mortgage lending is at the top end of this ratio, but that number has been steadily creeping up with rising house prices and a stabilising economy.
“These actions will bite if there is sustained momentum in the housing market over the coming years,” said Bank governor Mark Carney of the trend for riskier lending when the changes were announced in late June.
“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,” he added.
London has seen the greatest increase in mortgages worth over 4.5 times the borrower’s income, from 10 to 22 per cent in six years.