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Carney moves to cap loan-to-income ratio on new mortgage lending

The Bank of England has moved to cap loan-to-income ratios on new mortgage lending in a bid to cool the housing market.

Last week, the Bank announced that from October, lenders must ensure no more than 15 per cent of their new lending is at more than 4.5 times income. It is consulting on the measure until the end of August.

The Bank will also require lenders to stress-test borrowers’ affordability against a 3 per cent increase in base rate.

The Council of Mortgage Lenders says its figures suggest 9 per cent of loans advanced in the first quarter had an LTI ratio above 4.5, while the figure was 19 per cent in London.

GPS Economics director Gary Styles believes there could be more of this kind of intervention to come from the Bank of England although not until next year at the earliest.

He says: “In the short term, I do not think these measures will have any effect. It really just shows the Bank’s intended direction of travel; that we are going to see more measures in future, particularly if the market does not begin to slow down.”

The cap does not cover buy-to-let deals, remortgages with no increase in the principal, equity release or second charge loans; but Help to Buy loans are covered.

John Charcol senior technical manager Ray Boulger says London buyers taking advantage of H2B could see their maximum loans shrink as a result of the new cap but this will affect only a small group of people. He says: “The only area where it will have any impact short-term is on people using the Help to Buy mortgage guarantee scheme
because, as things stand, with a good credit score it is possible to get five times or slightly more income.

“Most people will not be offered this level of income but some will – mainly in London – and they will now have their loan restricted.”

The MMR contains a requirement for lenders to stress-test borrowers with lock-in periods of fewer than five years against the standard variable rate plus an additional percentage, and that lenders assume at least a 1 per cent increase in base rate. The FCA recommended using the five-year forward sterling rate as a guide for stress-testing borrowers.  

London Money director Martin Stewart says the MMR and lenders will ultimately dictate how to cool the market, not measures from policymakers. He says: “Anything that comes out of a policymaker’s mouth is just rhetoric.”

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David Hollingworth, associate director of communications, London & Country
Most lenders say they are not making much of a change but setting a hard-and-fast rule of 3 per cent suggests there was a range and some lenders will have to toughen up a bit.

Soundy

Neil Soundy, mortgage broker, Neil Soundy Financial Services
Although the cap will not be in place for a while, lenders will start changing before then. It is good news for brokers because anything that makes people think it is more difficult to get a mortgage will make them more likely to use a broker.

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