2014.06.2609:56:00UTC+00U.K. Tightens Mortgage Lending Conditions To Calm Property Market

The Bank of England on Thursday tightened the mortgage lending rules in order to contain overheating in the property market and avert threats to financial stability. The bank focused on limiting the home buyers from taking loans beyond their repayment capacity.

Though the household indebtedness currently pose no imminent threat to stability it is "prudent to insure against the risk of a marked loosening in underwriting standards and a further significant rise in the number of highly indebted households," the BoE said in its semi-annual Financial Stability Report.

At higher levels of indebtedness, households are more likely to encounter payment difficulties in the face of shocks to income and interest rates. This could pose direct risks to the resilience of the U.K. banking system, and indirect risks via its impact on economic stability.

The Financial Policy Committee of BoE recommended that mortgage lenders should limit the proportion of mortgages at loan to income multiples of 4.5 and above to no more than 15 percent of their new mortgages.

Further, the FPC said mortgage lenders should apply an interest rate stress test that assess whether borrowers could still afford their mortgages if, the bank rate were to be 3 percent points higher than the prevailing rate during first five years of the loan.

The new rule will come into force on October 1. Mortgage offers made or decisions in principle taken after October 1 will count towards the limit.

Policymakers were forced to take actions after house prices started rising consistently, which would ultimately increase household borrowing that they finally might not be able to repay.

These tentative measures will not significantly impact the outlook for the housing market in the near term, James Knightley, an ING Bank NV economist, said. Moreover, this will not affect cash buyers and foreign buyers who do not need a mortgage, nor even people looking to take out a buy-to-let mortgage.

The latest measures introduced by the BoE are practices that are already been followed by many lenders, IHS Global Insight's Chief U.K. Economist Howard Archer said.

The one measure that can really be pretty certain of containing house price increases is building substantially more properties. This is obviously something that is outside the Bank of England's control, Archer added.

Chancellor of the Exchequer George Osborne said new loans above 4.5 times borrowers' income will be excluded from the government's Help to Buy scheme, following the introduction of a loan-to-income limit on mortgage lending by the central bank.

BoE Governor Mark Carney said new measures are less likely to have implications for the path of future monetary policy that anticipates limited and gradual rate rise. He said policymakers will evaluate the effect of today's measure and recalibrate them, if needed.

The Council of Mortgage Lenders Director General Paul Smee said, "Additional housing supply to help correct the imbalance between supply and demand is the main way of relieving affordability pressure and household indebtedness attributable to mortgage borrowing over the long term."