Financial News

  • 27 June 2014, 13:41

New Mortgage Level Caps To Cool Housing Market

The Bank of England is to impose new caps on mortgages from October, limiting the loan-to-income (LTI) ratio for most applicants.

The new rules apply to those seeking new mortgages or seeking to re-mortgage.

The bank said 85% of mortgage approvals would need to be below the LTI cap of 4.5 times the applicants' income.

The decision is to help cool the housing market in certain areas, and to prevent a build-up of risky lending.

In afternoon trades in London, key housebuilding companies were up by an average of 5%, showing market support for the plan.

Bank governor Mark Carney, speaking on the publication of the Financial Stability Report, said the "gains in house prices were at the limit of our tolerance on rising debt".

He said the economy was still quite vulnerable and reiterated previous comments that housing market instability remains the biggest risk to the UK.

The BoE said that lenders should apply a new "interest rate stress test", to calculate if the base rate rises to 3%, if borrowers can keep up their mortgage repayments.

The current base rate has been at a five-year historic low of 0.5%.

Although the governor recently hinted of a possible rate rise shortly, analysts now expect the rate to stay on hold until the wider economy recovers.

Hargreaves Lansdown senior economist Ben Brettell said: "Therefore despite Mark Carney's recent comments that interest rates could rise sooner than expected, I believe they will remain on hold well into next year.

"The bank will want to give today's measure on the housing market time to take effect, and will want to see hard evidence that the spare capacity in the labour market has been absorbed before considering higher interest rates."

The bank's announcement comes as new data showed that more than 35,000 households have been helped by the Government's low-deposit Help to Buy (HTB) schemes.

Housing minister Kris Hopkins said that since HTB was launched 14 months ago, 22,831 homes have been bought through the equity scheme.

In addition, another 7,313 sales were completed using he Help to Buy mortgage guarantee scheme.

That scheme was launched across the UK last October.

The Treasury also confirmed that no new mortgages around the LTI limit of 4.5 would be allowed under Help to Buy.

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