THE HELP to Buy scheme could leave house buyers dangerously overstretched by encouraging them to take out risky mortgages, the incoming Bank of England deputy governor warned yesterday.
The mortgage guarantees on offer from the government mean banks will be protected against taking excessive risks, but borrowers could be encouraged to over-reach themselves, Sir Jon Cunliffe told MPs.
George Osborne introduced the scheme to make it easier to buy a home with a deposit of as little as five per cent, but there are fears it could promote a bubble in the market.
“In terms of whether it leads to households becoming over exposed, because they can now borrow higher amounts, there is a possibility it could do that, and that would create more of a risk,” he told the Treasury Select Committee. “That is one of the reasons it is necessary to keep a very firm eye on the lending standards lenders use.”
“If it contributed to house prices going up at an unsustainable rate and that contributed to a threat to financial stability, that is something one would have to look at.”
And he added that if a bubble does emerge in the housing market, the Bank of England might end up asking for the power to cap loan to value ratios on mortgages.
It came as new figures from the Mortgage Advice Bureau show record numbers of buyers fixing their mortgages at ultra-low interest rates.
A record proportion of homebuyers chose to fix their rate in September, with 93 per cent opting against variable rates. And 91 per cent of remortgagers chose to fix, up from 79 per cent just a month earlier.
The average two-year fix is down 1.01 percentage points in the year, from 4.57 per cent in September 2012 to 3.56 per cent last month. The average five year fix is down from 4.6 to 3.87 per cent.
“This means Help to Buy is coming on-stream at a time when confidence and momentum have already resurfaced in the market,” said the Mortgage Advice Bureau’s Brian Murphy.