Here are some key points from this morning’s announcement:
– The FPC is to place restrictions on the proportion of mortgage loans worth more than 4.5 times a borrower’s income. Under the new rules these loans must not occupy more than 15% of a firm’s new mortgage lending.
– While the rules will not come into force until October 1, the Bank expects lenders to operate within the spirit of the guidelines until then.
– Mortgage lenders must apply an interest rate stress test to assess whether borrowers could still afford their mortgages if, at any point over the first five years of the loan, Bank Base Rate rises to 3% higher than the rate at origination.
– It expects that if rates did rise by three percentage points more than 50% of borrowers with loans worth 4.5 times income would need to ‘take action’.
– The changes are likely to have a greater effect on the London market where the proportion of borrowers taking out loans of this kind is already above 20% and rapidly rising (see chart opposite).
– The Bank expects the impact of the recommendation to be small, although says some lenders will need to ‘enhance current practices’ to meet the new requirements.
– While the buy-to-let market has escaped any formal regulation at this point, Prudential Regulation Authority head Andrew Bailey said the market would continue to be monitored.
– The central bank said the future of the housing market is uncertain but its central prediction was for house price inflation of 20% until the middle of 2017 before falling towards 4% a year. This would result in house purchase lending of £45bn a quarter by mid-2015.
– Its upside prediction would see house price increases of 45% during the same period, a trajectory that would result in house purchase lending of over £70bn by the first quarter of 2017.
– The FPC said the new rules would prevent ‘excessive household indebtedness’ and lenders should continue to apply whatever criteria they feel are appropriate to their risk appetite when taking individual lending decisions.
