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Housing Solicitors

Bank of England announces “mortgage cap” to prevent housing market overheating (27 June 2014)

Date: 27/06/2014
Duncan Lewis, Housing Solicitors, Bank of England announces “mortgage cap” to prevent housing market overheating

The Bank of England's Financial Policy Committee (FPC) is proposing to introduce a cap on mortgage lending, to prevent borrowers from taking out home loans they would be unable to repay when interest rates rise.

The measure has been welcomed as an “insurance policy” against a property bubble and the impact of this on the UK’s economic recovery when interest rates rise.

The onus will be placed on mortgage lenders to make sure that they do not authorise more than 15% of mortgage offers for borrowers who are taking out mortgages more than four-and-a-half times their salaries.

Usually, mortgages are computed based on three times a borrower’s salary – including three times a couple’s joint salary.

However, there has in the past been a trend for high earners to take out mortgages up to five times their annual salary.

The Bank of England’s FPC says the proposals to limit “risky” lending are unlikely to affect buyers in the current market – but once interest rates rise, home buyers could be limited to buying homes within a more modest budget.

Under the government’s Help to Buy scheme, buyers can buy properties up to £600,000, putting down a 5% deposit.

There are fears this could have encouraged some buyers to stretch themselves financially to be able to buy a larger property, or a property in a more desirable location.

The current low-interest rates are beneficial to those with a mortgage – but when interest rates rise, as they are expected to within the next year, monthly mortgage repayments will also increase.

Homeowners already living at the top of their budget could face financial problems when interest rates rise.

The Treasury has already said that borrowers who need four-and-a-half times their salary will be barred from buying under the government’s Help to Buy scheme – under the scheme, the government also underwrites part of the mortgage up to 15%.

The new limitations on lending will be introduced from October – and will also include more stringent checks on those applying for a mortgage, to make sure they could afford to meet their monthly mortgage repayments if rates should continue rising by up to 3%.

Earlier this year, lenders tightened up the criteria for mortgage applicants, including asking them how much they spend on leisure activities per month, such as gym membership – as well as how much they spend on “essentials”, such as mobile phone top-ups.

Bank of England Governor Mark Carney has said that there is not an immediate threat to the stability of Britain’s economic recovery – but has warned recently that interest rates may increase sooner rather than later.

Mr Carney has warned that escalating property prices could mean that responsible lending could soon turn to “reckless” lending in a very short time period – adding that by the end of the year, lenders could reach their 15% limit on mortgages which are four-and-a-half times an applicant’s salary.

Duncan Lewis Housing Lawyers

Duncan Lewis is a leading firm of housing lawyers and can advise owner-occupiers on problems with mortgage debt and mortgage repossession.

Duncan Lewis housing lawyers can also advise rental tenants on Local Authority housing and housing benefit, as well as Landlord & Tenant disputes, disrepair of rental property and unlawful eviction.

Duncan Lewis is also a leading firm of Legal Aid lawyers.

For expert legal advice on housing law, contact Duncan Lewis housing lawyers on 020 7923 4020.


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