The government has today (25 June 2014) announced that no new loans at or above 4.5 times borrowers’ income can be included in the Help to Buy mortgage guarantee scheme, following the introduction of a Loan-To-Income (LTI) limit on mortgage lending by the Bank of England.
This follows the Chancellor of the Exchequer’s announcement earlier this month at Mansion House that any mortgage lending limits introduced by the Bank of England would apply to all Help to Buy mortgage guarantee loans. This commitment was welcomed by the Governor of the Bank of England.
As set out in the Financial Policy Committee’s Financial Stability Report, published today, mortgage lenders will be prevented from extending more than 15% of new mortgages at LTIs at or greater than 4.5 times.
While the Financial Policy Committee (FPC) is clear that household indebtedness is not an immediate risk to financial stability, and notes that most lenders currently operate within its new LTI limit, it has introduced these new LTI limits to insure against potential risks to financial stability if mortgage lending standards were to loosen markedly in the future.
The new limits on banks’ borrowing will apply to every single loan under the Help to Buy mortgage guarantee scheme.
In his Mansion House speech the Chancellor also reiterated that the Bank of England should use its powers to take the action necessary to protect financial stability.
The latest official statistics for the mortgage guarantee scheme demonstrate that the scheme:
- is supporting responsible lending: on average households are purchasing houses worth around £150,000 (well below the UK average price of £260,000) at an income multiple of 3.1 times salary
- is not a significant factor driving house price rises: mortgages supported by the scheme account for just around 1.3% of total mortgage lending
- is predominately supporting house purchases outside of London and the South East (81%), where house prices are rising at a modest rate
While at present less than 5% of loans under the mortgage guarantee scheme are at loan to income ratios at or above 4.5, the scheme rules will be amended to ensure that no new loans at or above 4.5 times borrowers’ income can be included in the Help to Buy mortgage guarantee scheme to provide a further safeguard and ensure that the Help to Buy mortgage guarantee scheme continues supporting responsible lending.
The Chancellor of the Exchequer, George Osborne, said:
I fully support this action by the Bank of England’s new Financial Policy Committee to use the new powers we have given them. It will help protect our hard-won economic security by better insuring us against any risks that might emerge in our housing market.
In the years before the Great Recession the failure to do this cost families dear and took our economy to the brink. I gave the Bank of England these new powers because I’m determined that we don’t repeat the mistakes of the past. I want to protect those who own homes, protect those who aspire to own a home, and protect the millions who suffer when boom turns to bust. Today’s announcement is a welcome sign that the new system we have created is working.
As I announced at the Mansion House earlier this month, I will apply any mortgage limits that the Bank of England imposes to every single loan in the Help to Buy mortgage guarantee scheme. This will ensure that Help to Buy can safely go on helping more families to achieve their aspiration to own their own home.
The Treasury will consult with lenders participating in the mortgage guarantee scheme to determine the best way to bring in this change and minimise the impact on existing mortgage applications within the scheme.
The Chancellor has asked the FPC to review the Help To Buy mortgage guarantee scheme in September to advise him on whether the key parameters of the scheme (the price cap and the fees charged to lenders) remain appropriate.