Please Note: This Article is 6 years old. This increases the likelihood that some or all of it's content is now outdated.

The Bank of England Thursday has announced a plan to introduce mortgage caps on lending later this year.

The Bank of England (BoE) Thursday has announced a move to cap riskier mortgage lending as they think the rapidly growing housing market is one of the biggest risks to the UK economic recovery.

The plan is that from October 2014, for loans where the value is 4.5 times the borrower’s income, these will be restricted to 15% of a lender’s new mortgage lending.

The cap will apply to banks and lenders where their residential mortgage lending is in excess of £100 million per annum. This measure is to be enforced by the Bank of England’s new Prudential Regulation Authority (PRA).

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According to the Office for National Statistics (ONS) the average price of a UK house is now £260,000 (April 2014), after a rise of almost 10% year-to-date. As prices rise they become a bigger multiple of borrowers’ wages, which are not rising anywhere near the same rates as house prices.

With interest rates at record lows, borrowers are currently able to handle repayments on increasing debts; the BoE worry is that as interest rates rise, which they are slated to do in the near future if the economy continues to improve, this could have a slowing down effect on the recovery.

Not only that, it would put thousands of over-borrowed house owners and possibly buy-to-let borrowers in dire straits, possibly precipitating another financial crisis.

With a steadily growing UK economy, and one predicted to reach 3% GDP growth in 2014, the last thing the Government and the BoE want to see is a waive mortgage defaults.

Many borrowers are already worried about the prospect of an interest rate rise and some banks, along with their stricter lending criteria are already applying self-imposed limits on higher loan to income ratios.

At a press conference this morning BoE executives stated that: “Lenders should continue to apply whatever criteria they feel are appropriate and commensurate with their risk appetite when taking individual lending decisions,” and that the measures announced “will only affect a small number of FCA-regulated firms”.

Please Note: This Article is 6 years old. This increases the likelihood that some or all of it's content is now outdated.
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