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Mortgage cap: did the Bank of England go far enough?

Simon Read

SimonBuilding 225x300 Mortgage cap: did the Bank of England go far enough?

Is the Governor building to a more sustainable mortgage market?

Plans by the Bank of England to cap riskier mortgage lending are being seen as an important part of the battle against the chance of a return to the problem mortgage market of the last decade.

Under the proposals, lenders will not be allowed to lend any more than 15 per cent of their residential mortgages at more than 4.5 times a borrower’s income.

If the government really believes that there is an impending housing bubble then putting a cap on high-value loans is long overdue.

Experience tells us that even a small slump in property prices can leave people in negative equity and anyone who has stretched their finances to the limit to borrow is at risk.

The announcement made yesterday was a major departure for the UK. As Andrew Tyrie, chairman of the Treasury Select Committee, said: “The measure is an important signal. It demonstrates the Bank’s preparedness to use a financial stability tool as an insurance against the risk of overheating. It is a major departure for the UK.”

But the question is, has the Bank gone far enough? Mr Carney has alighted on 4.5 times salary as his limit to, as he puts it, set a “fire-break” on riskier lending.

But some lenders, such as Lloyds and RBS, have already set their limit lower, at four times income, albeit only for loans worth more than £500,000.

As we discovered in the crazy days of the last decade when banks lent almost to anyone with a pulse, we need sensible limits on lending.

Maybe The Governor should have listened to the banks and, as well as limiting to 15 per cent the number of loans at high multiples of income, he should have cracked down on how high those multiples should be with higher-value loans.

It says something when our high street banks are being more prudent than our financial guardians.

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  • greggf

    “The announcement made yesterday was a major departure for the UK.”

    Really – you must be one of Paxman’s 13 year olds!
    I can remember mortgages of 3x salary, proof of salary from an employer, insurance for the balance and a minimum deposit of 10% and that was in the late-eighties……!

  • DepotCat

    Yes – I remember it well.

  • pobinr

    Cool the market cut immigration


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