The Bank of England gave a clean bill of health to Britain’s flagship mortgage guarantee scheme on Thursday, sparing the government from potential embarrassment in the run-up to a national election.
But it asked for new powers to curb risky mortgage borrowing - including funding for buy-to-let investments for the first time - and said it would speed up plans to limit how much banks can lend relative to their capital.
When the BoE took over regulating Britain’s financial sector in April 2013, it shied away from the politically sensitive job of limiting how much Britons could borrow to buy a home.
Since then, house prices have jumped by 14 per cent and the BoE's new Financial Policy Committee (FPC) has grown in confidence.
The government of prime minister David Cameron asked the FPC to pass verdict on the Help to Buy mortgage guarantee scheme it launched late last year as a way to help home-buyers who could afford mortgage repayments but lacked a large deposit.
The plan was criticised at the time by opposition lawmakers and many economists for its potential to push up house prices, which have since risen by around 10 per cent.
The BoE said on Thursday that Help to Buy was not to blame, as it only accounted for around 5 per cent of mortgages and was most used in regions where house prices had risen least.
“The scheme does not appear to have been a material driver of (house price) growth - for example, take-up of the scheme has been weak in London where house price growth has been strongest,” the central bank’s Financial Policy Committee said.
The FPC said house prices were cooling sooner than it had expected a few months ago when it urged banks to restrict some types of mortgage lending, and said Help to Buy had not led to looser lending standards.
Britain’s housing market remains on the political agenda ahead of next May’s national election. Mr Cameron this week announced new measures to make cheap homes available to younger home-buyers.
New powers
The FPC on Thursday formally recommended that it be given the legal power to cap how big a mortgage Britons can take out relative to their income and the value of their home.
Finance minister George Osborne said in June that he was willing to give the BoE this type of power, and on Monday he said that he wanted to get this into law before May's election.
The FPC can already recommend loan-to-value and loan-to-income caps on residential mortgages, and in June it urged banks to issue no more than 15 per cent of mortgages at loan-to-income ratios above 4.5 times a borrower’s income.
On Thursday, it said it wanted the legal power to force banks to comply, and to extend these restrictions to buy-to-let mortgages used by property investors. Restrictions on home-buyers’ mortgage borrowing should take into account their total debt, not just the size of their mortgage.
The FPC said it wanted the powers to cover future risks from the housing market and not because it wanted to use them now.
For buy-to-let mortgages - which make up 12 per cent of new lending - it will apply an ‘interest coverage ratio’ to ensure that rental income from a property is comfortably higher than interest payments. Easy access to buy-to-let mortgages for professional investors has been blamed by critics for making it harder for others to buy their own homes.
The Council of Mortgage Lenders, an industry body, said it hoped the FPC would be clear about what exactly could trigger the implementation of tougher rules.
Earlier this year, BoE Governor Mark Carney said a further big build-up in mortgage debt - which is already at a high level - was the greatest single threat to a sustainable recovery.
Reuters
