MortgagesApr 19 2018

Bank says 'warning light' flashing in mortgage market

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Bank says 'warning light' flashing in mortgage market

Mortgage lenders are prepared to take a little more risk, with loan to income ratios rising, meaning warning lights are flashing in the market, according to Alex Brazier, executive director for financial stability at the Bank of England.

He said the Bank has tried to prevent a repeat of previous excesses in the mortgage market by restricting the loan-to-value of a typical mortgage to 4.5 times the annual earnings of the borrower.

But with house prices having soared in the years since the financial crisis, when they fell heavily, increasingly people are borrowing at this upper limit to buy property.

“The proportion of new owner occupier mortgage loans at loan-to-income ratios just below 4.5 has almost doubled in the past 5 years. Almost a fifth of new mortgages now fall into this bucket,” Mr Brazier said.

But he added only a tiny amount - 1.4 per cent - of households spend 40 per cent or more of their income servicing their mortgage debts.

"And even if interest rates were to be at 2 per cent, that share - at 1.9 per cent - would be no more than it has been on average in the past", he said.

The latest data from the Office for National Statistics (ONS) showed that UK house prices rose by 4.4 per cent in the year to the end of February, 

Yet the most recent figures from trade body UK Finance, showed that 2017 saw the highest number of first time buyers purchase houses since 2006, immediately prior to the financial crisis when house prices were also historically high.

Mr Brazier pointed out banks have been “stress tested” to measure the consequences of a severe economic downturn and found to be robust. 

He said the consequences for the wider economy of mortgages becoming less affordable are severe.

If people must spend more to service their mortgage then they have less disposable income to spend in the wider economy.

This drags down the level of demand in the economy, reduces earnings and increases the likelihood that more people will have trouble paying their mortgage.

As FTAdviser has previously reported, the government has recently introduced changes to the benefits system for those who have been receiving government support with mortgage payments, which it has been warned, could be catastrophic for the mortgage market.

David.Thorpe@ft.com