Mortgage Cap Unlikely To Be Put Into Effect In The Near Future

Mortgage Loan AgreementMortgage lenders have announced that they believe a cap on the size of mortgage loans will not be “the first tool in the box” to cool the housing market.

George Osborne, Chancellor of the Exchequer has plans to award the Bank of England the power to impose a cap on home loans related to relative income or the value of the property. Currently, the bank can advise upon such a cap but do not possess the powers to impose one.

Affordability Tests

However, lenders believe that affordability tests are a more important factor for those attempting to purchase a home.

The Bank of England also currently has powers to ensure that banks carry certain levels of capital, preventing any return to what most regard as the under-encumbered mortgage lending witnessed before the financial crisis hit in 2008.

The cap was announced shortly after Business Secretary Vince Cable stated that he was “appalled” that some banks had been lending more than five times the income of mortgage applicants, suggesting a reasonably stable level was a maximum of 350 per cent of said income.

The Council of Mortgage Lenders (CML), said that there was a noted difference in giving the bank the power to cap loan-to-income levels and the bank deciding to use that power. “It would not be the first tool in the toolbox,” the council stated.

Just a Reserve Power?

Former Conservative Chancellor, Lord Lawson also said that it could be more of a backstop. In an interview with the BBC, he said that he believed that this would be a “reserve power” and was highly unlikely to be used at all.

As a result, it is unlikely that this would instantly make it harder to secure a mortgage. Yet the initial cost of a mortgage could be expected to rise if interest rates increase, and this could mean that getting a deal would be more difficult for some buyers.

Mr Osborne confirmed in his speech that the Bank’s Financial Policy Committee would be given the new capping power before the end of this term of parliament in May 2015.

“I want to make sure that the Bank of England has all the weapons it needs to guard against risks in the housing market,” the Chancellor said.

However, Kate Barker, former member of the Bank of England’s Monetary Policy Committee, explained that she was concerned that these measures were transferring excessive power to the Bank.

Expert’s Opinion

Rupert Snowden, property expert at Innovo Property said that he believes that a mortgage cap would negatively affect many young buyers looking to purchase their first home.

“If a mortgage cap were to be introduced, it would prevent many first time buyers with sound financial history and the means to fully repay their mortgage from being able to access the funds required to purchase a property.

“The last thing we want to do is alienate the next generation of homeowners, but that is exactly what will happen if the Bank of England decides to use the powers they have been granted.

“In my opinion, the decision [to allocate these powers to the BOE] is one that could massively backfire for the current government, and I would not be surprised if there was a massive public backlash.”

Bradley Shore is an experienced investment and real estate writer, he aims to impart relevant knowledge upon his readers and to help them make the correct decisions when investing.