Bank of England to cap mortgages from October

The amount of money UK homebuyers could borrow on mortgages would be capped from October, with tougher checks on whether they could afford repayments, The Herald Scotsman reported.

According to the Bank of England's Financial Policy Committee (FPC), loans of 4.5 times a borrower's income or higher should account for no not over 15 per cent of new mortgages.

The Bank of England, which announced the new restrictions, said lenders needed to apply a new "stress test" to ensure that borrowers could keep up their mortgage repayments in the event of an increase of up to 3 per cent in interest rates over the first five years of the loan.

According to Philip Hogg, chief executive of industry body Homes for Scotland, the body was pleased that the Bank of England had listened to calls for a targeted response addressing areas where house prices were at significantly higher multiples to income, and support the principle of sustainable, responsible lending, the report said.

As all commentators had recognised, there were no signs of a housing bubble in Scotland, where market recovery continued to be fragile, he added.

According to figures from the Council of ­Mortgage Lenders (CML), nationally 9 per cent of new home loans were for 4.5 times income or more, while this figure was 19 per cent in London.

While the Bank of England (BOE), in the first of two recommendations of the FPC said yesterday lenders would need to limit the proportion of mortgages at 4.5 times income to not over 15 per cent of their new home loans, it also said banks must decline mortgages to borrowers who failed a new repayment test, Bloomberg reported.

"Without policy action, the risk of excessive household indebtedness is material," the BoE said in its semi-annual Financial Stability Report. "The policy package is targeted to mitigate this risk in a prudent and proportionate fashion," it said.

The measures were a test of the BOE's new macro-prudential tools, which the UK government in 2010 granted as part of an overhaul of banking regulation. These are also perceived as a major initiative by the bank to actively tackle the threat of an asset bubble and avoid a repeat of the 2008 financial crisis.

According to the BoE, household debt levels did not pose an "imminent threat to stability," but it wanted to insure against the risk of a "marked loosening" in lending standards.