Mortgages  

Bank LTI warnings may have stemmed lenders

Bank LTI warnings may have stemmed lenders

Authorities voicing concerns on high loan-to-income ratios have encouraged some lenders and borrowers to “step back”, minutes of a meeting held between the chancellor and governor of the Bank of England have revealed.

Minutes of a meeting held between George Osborne and Mark Carney reveal talk turned to Bank’s Financial Policy Committee taking action to guard against the biggest domestic risks to financial stability, which it believed arose from the housing market.

In June 2014, the committee took steps to insure against a loosening of underwriting standards and further significant increases in the number of highly indebted households, by recommending lenders limit their exposure to loans above an earnings multiple of 4.5x.

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Since then, Mr Carney said activity in the UK housing market had slowed and near-term indicators of house price inflation had weakened markedly, particularly in London.

The pair talked about how a number of factors might have caused this moderation. It was suggested that momentum in the market had eased, particularly in London, reflecting concerns about the near term sustainability of house price inflation.

The introduction of the Mortgage Market Review might also have had an impact on housing market activity, it was concluded.

In June, the Financial Policy Committee published a report which recommended regulators ensure mortgage lenders limit the amount of their customers that are able to take out a mortgage at more than 4.5 times their income.

Last year, the Council of Mortgage Lenders said the FPC should publish a review of the impact and effectiveness of the caps.

The minutes said: “The Bank’s market intelligence suggested that some lenders had tightened their lending criteria in Q3 2014.

“And while the FPC’s recommendation on lending at high LTI ratios was not expected to have had a material impact on mortgage lending in the near term, the authorities voicing concerns might in itself have encouraged some lenders and borrowers to step back.”

Notwithstanding the recent moderation, Mr Carney and Mr Osborne also talked about how UK household sector debt levels remained elevated relative to incomes and, while further increases in risks from the housing market had not occurred since June, momentum might return to the housing market — for example, if the recent changes to stamp duty provided support.

The committee’s insurance therefore remained relevant, it was concluded.

The government had also taken important steps to improve housing supply, such as by reforming the planning system, the pair said.

emma.hughes@ft.com