Just one day after announcing a slight relaxation in one mortgage rule, the Bank of England has called for legal powers to limit the loan-to-value ratio on new mortgages, including those for buy to let investors.
Under rules recommended by the Financial Policy Committee, lenders must ensure that no more than 15 per cent of new mortgages are given to people borrowing over 4.5 times their income. Lenders must also stress-test borrowers' ability to repay if the mortgage rate moves to three per cent above the rate in place when the loan was originally approved.
The Bank of England emphasises its role in seeking to avoid future financial crisis in supplementary information it has now released. it says about two-thirds of major banking crises are triggered by volatile housing market movements, while recessions after a housing collapse are between two and three times deeper than other recessions.
Hence, it wants greater control - and that includes over investments in the lettings sector.
Critically, the FPC will not just recommend changes but wants not to be able to directly implement them.
The government has put the proposal to consultation but has indicated that it will grant the request for legal powers to be passed to the bank, and they are likely to become law next year.
Ironically this news comes just a day after we reported in Estate Agent Today that a small number of small niche' lenders would be exempted from the 15 per cent/4.5 times income rule.
This recommendation came from another arm of the Bank of England, the Prudential Regulation Authority, which wants lenders with under £100m of new mortgage lending a year to not be tied by the new rule.
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Comments
It's good that the Bank of England are finally doing something to protect our economy against further financial problems, if only they had done this 10 years ago, I wonder where our economy would be now!