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BoE to review mortgage market recommendations
Dec 12, 2020
The Bank of England will review its mortgage market recommendations next year, which limit the proportion of loans that can be offered on high LTV ratios.
In its latest financial stability report, the BoE said changes in the risks faced by households warrant a review of these recommendations and the way they are calibrated. This is already underway and will report in 2021.
The BoE pointed out mortgage credit conditions have tightened recently, particularly at these higher LTVs. However it said this was likely to be the result of the general economic outlook, coupled with operational constraints at lenders, rather than a direct result of its policies.
Given the economic outlook the BoE stressed that UK banks are strong enough to support both households and business during this period. The fiscal stability report detailed the high levels of capital help by banks, which allows them to take losses while continuing to lend.
These FPC market recommendations are structural measures designed to be in place across the market cycle to increase the stability of the banking system.
In this report the BoE set out how activity in the housing market has picked up sharply, since lending restrictions were eased after the first national lockdown.
Its figures show the number of mortgage approvals for house purchase increased to around 97,500 in October — their highest level since September 2007. Changes to stamp duty have supported this activity it said.
However it adds that this surging demand may be causing operational issues for some lenders.
“Intelligence from the Bank’s Agents suggests that the high volume of applications has led to operational difficulties for lenders, lengthening processing times.
“Supervisory intelligence suggests that lenders also continue to face Covid-related operational constraints — for example, from staff shortages and complex income assessments. As a result, lenders may have increased spreads and reduced product availability to manage the flow of business.”
The BoE added: “Since their implementation there is no evidence that the FPC’s measures have had a material impact on mortgage availability in aggregate.
“The FPC’s mortgage market recommendations work by limiting the amount that prospective mortgagors can borrow relative to their incomes.
“These measures operate alongside other constraints — dictated by lenders’ own internal risk appetites — that together influence how much a prospective mortgagor is able to borrow.
“Assessing the precise impact of the FPC’s mortgage market measures at any time is difficult because what individual borrowers would have done in the absence of the measures is not directly observable.”
It said bank staff had reviewed household level data to make a preliminary assessment of the extent to which the FPC’s mortgage measures — and, specifically, the affordability test recommendation — might be constraining renters who want to purchase a home.
Results suggest that the majority of renters (75 per cent) were constrained by the lack of sufficient savings to meet deposit requirements, not by FPC policies, it said.
The BoE said the remaining 25 per cent of renters are in principle constrained in the amount they could borrow by their income. Its figures show about 44 per cent of this group — representing 11 per cent of total renters — could afford the median first-time buyer property if the FPC’s measures were not in place and they were instead subject only to minimum affordability testing standards.
It added that 36 per cent of the group — 9 per cent of total renters — are still able to pass the FPC’s affordability test in purchasing the median first-time buyer home in their region.
The BoE says: “This suggests that the FPC’s Recommendations might currently be constraining only around 2 per cent of renters from purchasing the median first-time buyer property. Those affected are likely to be concentrated in regions where homes are more expensive relative to incomes, such as in London.”
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