Thursday, 3 July 2014

Will the new Bank of England mortgage regulations really change the housing market?

In an attempt to control the UK housing market the Bank of England has recently put in place new regulations on mortgage lending. The BofE claims the new rules will help to control the UK housing market; at a closer look it doesn't seem like they'll have much of an effect at all.

The new rules mean mortgage lenders will not be able to lend more than 15% of their total new residential mortgages at a loan to income ratio of 4.5 times or above. Significantly, the 15% limit will apply to total mortgages completed as opposed to total value. It all sounds quite good on face value, why wouldn't it be a good idea to stop people getting into too much debt relative to their salary? This should protect consumers, no? Take a closer look at the figures and you'll see the new regulations actually leave room for banks to increase the current average loan to income ratio of 3.22.

Firstly, only 9% of new mortgages at the moment break the 4.5 limit. Banks could increase that on average by 6% and still be within the rules. The only area that will really be affected will be London were 19% of loans break the 4.5 rule. Secondly, the rules will only apply to banks lending more than £100m meaning small banks and building societies will be exempt. An attempt to avoid 'too big to fail'? I think so, however even the big banks are only limited on total mortgages completed as opposed to total value. Limiting total value banks could lend isn't something I could see happening  despite the fact it would be far better for the housing market in the long term; admittedly with a few casualties along the way.

The new rules also require a 'stress test' be used to make sure borrowers can repay their loans in the event of a rise in interest rates. The BofE now requires lenders to test borrowers ability to repay their loan over 5 years with a 3% rise in interest rates. Most lenders already apply a test of 6-7% so I can't see many cases when a 3% test would be useful.

In short the new rules leave plenty of room for the housing market to grow nationwide with a small chance of a cooling in London, the later being the main aim I feel. Considering the amount of foreign money thrown at London property, prices could continue to rise while income stagnates and Londoners aren't able to buy because banks are limited to the 4.5 rule across 15% of their mortgages. Good for investors, bad for those just wanting a place to live.

We need to get away from looking at houses as an investment to live in and start looking at houses as just homes. How we do that however I have no clue.