Bank of England warns lenders over risky mortgages

BANK governor Mark Carney says if left unchecked, high-risk loans could undermine recovery.

Lenders are being warned against risky mortgages

The Bank of England has warned lenders over supplying risky, high value loan-to-income mortgages.

The Bank's Financial Policy Committee (FPC) has said loans of 4.5 times a borrower's income or higher should account for no more than 15% of new mortgages issued by lenders.

It said also lenders should apply a new "interest rate stress test" ensuring that borrowers can keep up their mortgage repayments in the event of a rise of up to 3% in interest rates.

The Bank said in its latest six monthly financial stability report: "The recovery in the UK market has been associated with a marked rise in the share of mortgages extended at high loan to income multiples.



The report said the FPC does not believe household indebtedness posed "an imminent threat" but said that it wanted to ensure against risk of a further significant rise in the number of highly indebted households.

Speaking at a press conference, Bank Governor Mark Carney sad the bank is focused on turning the economic recovery into a "durable expansion".

He said: "The legacy of high indebtedness and structural imbalances mean that there are financial stability risks that if left unchecked could undermine the durability of that expansion. And the biggest risks relate to the housing market."

Mr Carney continued: "The prospects for household indebtedness concern us. Although UK households have made progress in repairing their balance sheets, they start at a vulnerable position, with debt at 140% of their disposable income.

"The share of mortgage lending at high loan-to-income ratios has increased markedly over the past year to a record high.

"Given the momentum in the housing market and the underlying shortage of housing supply it's likely that this trend will continue."

He said the Bank does not believe that the level of household indebtedness poses an imminent threat to stability.

He continued: "However, as we've seen, time and again how quickly responsible can turn to reckless, creating risks that ultimately derail the UK economy."

Mr Carney said that mortgages are the single largest liability for UK households - representing 80% of household debt.


"That's why recessions that follow rapid periods of credit growth.. those recessions tend to be deeper and longer-lasting."

In terms of how the changes will immediately affect someone applying for a mortgage, Mr Carney said: "If yesterday, you went into a bank or building society and you were approved for a mortgage, you would be approved for that mortgage again today under these terms.

"There is room under the cap for institutions to continue to lend at high loan-to-income mortgages and the best institutions, the most prudent institutions were testing using an assumption of bank rate that's 3% higher than origination.

"What these mean is that the shift from that responsible lending we're seeing today, a potential shift of that into reckless widespread high loan-to-income high loan-to-value risker lending tomorrow, a shift that we've seen in this country countless times in past housing cycles - that can't happen...

"We're acting today in a proportionate and graduated fashion to reduce risk in the future."