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Regulators Ready to Crack Down Further on Mortgages

Written by Sam Jones on 07 May 2014.

We are pleased to see UK regulators and politicians alert to the prospect of a housing bubble. House prices continue to rise rapidly in some parts of the UK and more than 10 per cent in some areas of London and the South East.

So far the Government has only sought to boost mortgage lending and housing supply through schemes such as Help to Buy and funding for lending.

It has come under fierce pressure to curb aspects of its Help to Buy scheme and has already halted funding for lending for mortgages.

We have seen mortgage lending grow significantly in the last year with the latest figures from the Council of Mortgage Lenders showing annual growth of 37 per cent.

Just last week the Royal Bank of Scotland said its lending has grown 22 per cent in the last year as banks regain the confidence to lend.

This is positive and we believe it should be put in some perspective. Most economists are predicting mortgage lending of around £200bn compared to £360bn in 2007 at the height of the boom.

We are nowhere near those levels yet but the rapid growth in house prices and lending has caught the attention of regulators and it matters to borrowers.

This is even more acute in an era of rock bottom interest rates which is usually seen as the biggest boost to home buying interest costs are so low.

In response last week, the Bank of England said it will test lenders’ ability to withstand a 35 per cent fall in house prices.

It will also assess whether they can stand a rise in interest rates to 4 per cent up from current 0.5 per cent levels under tough new stress-testing later this year.

This move follows the European Banking Authority stress tests this year which will test the resilience of banks across the EU.

During the last crash house prices fell as much as 20 per cent so these new tests are on the cautious side and show how seriously Governor Mark Carney is taking possible falls.

Carney lived in London in the 1990s when house prices crashed and interest rates rocketed after Black Wednesday in September 1992.

He said he will do everything he can to stop another boom and bust cycle and has focused heavily on underwriting standards.

This is the new mortgage rules that aim to bring in common-sense lending and quiz borrowers in much more detail about their spending and income.

Borrowers’ lives will come in for far more intensive checks to ensure they can afford their loan. 

Carney says he will watch underwriting standards very closely and crack down even harder if he feels they are slipping.

This means borrowers could face even more intense questioning in the future and if the current trajectory continues then this is a likely option.

For borrowers, this is not just of academic importance and it should inform their decisions too.

Borrowers need to ask themselves - Could you afford a 35 per cent drop in house prices? How would your finances react to 4 per cent interest rates?

The Bank is on the ball in reacting to future problems and borrowers should take heed in their own lives and financial circumstances.

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