Bank of England sent dire financial crash warning– new mortgage rules risk horror meltdown

House prices: Expert discusses 'interesting' pricing differences

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In its recently published Financial Stability Report the central bank explained it has two measures regulating the mortgage market. The first limits the percentage of new mortgages that a bank can issue at high loan to income ratios while the second requires lenders to stress test whether borrowers could afford their mortgage if interest rates rose three percent above their standard variable rate. The Bank is now going to consult on removing the second of these measures which it says will make the rules simpler. CEO of mortgage provider LendInvest Robert Lockhart said the changes were “welcome news”.

He explained: “In such a low-interest rate environment, three percent has always been an extreme end to the probability of where interest rates will land.

“In stressing at this level, it has excluded a segment of customers (particularly first-time buyers) from home owners who can demonstrate they have the ability to meet a mortgage payment.”

However the rule change may not necessarily benefit first-time buyers in the long run.

Karen Noye, mortgage expert at Quilter, pointed out the main issue was wages failing to keep up with soaring house prices meaning it was increasingly difficult for buyers to save up a deposit.

Simply lending more would not necessarily solve this root cause, particularly given relaxing affordability rules could in itself drive prices up higher.

CEO of The Mortgage Lender Peter Beaumont also warned the changes: “could further exacerbate HPI, which could take house prices to an unsustainable level.”

House prices have already been pushed to record highs this year through a combination of lack of supply, low interest rates and the stamp duty holiday.

Ms Noye warned relaxed lending criteria on top of this could result in an “unsustainable housing bubble forming”.

She also expressed concern over how the rules could be tweaked, adding: “These affordability rules were brought in after the financial crash and any changes to these rules should be very carefully consulted on to avoid a potential repeat of the catastrophic problems that we saw more than a decade ago.

“Let’s not forget these rules are in place to prevent borrowers potentially getting into financial difficulties and to guard against banks sustaining subsequent loan losses.”

The Bank of England is not the only institution to set affordability criteria though, with the Financial Conduct Authority (FCA) also requiring mortgage lenders to apply a test of interest rates rising a minimum of one percent over the first five years of a new mortgage.

In its report, the Bank of England felt this remaining requirement provided sufficient protection on financial stability.

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Property Economist at Capital Economics Andrew Wishart suggested the Bank was “probably right” in suggesting the impact of the rule change would be marginal.

However, he added that it would allow some borrowers to take out larger mortgages, potentially leaving them more vulnerable to a future interest rate rise.

He predicted the changes would push up demand most in London and the South East where the need for larger mortgages was highest.

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