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Bank to Slow Mortgage Demand

Written By On 24/06/2014

Lenders are anticipating home loan applications to continue to escalate for the next few months, but the Bank of England have hinted strongly their intention to wane the appetite for certain precarious mortgages.

Concerns that a house price bubble being strongly led by London property may explode in everyone’s faces has caused obvious worries for the BOE.

A decline for mortgage approvals were being widely tipped for this year’s second quarter. However, according to the Bank's Credit Conditions Survey ‘significant increase’ was shown in the demand for mortgages.

The Office for National Statistics recorded that London property prices rose by 18.7 per cent within the last year. The ONS also said that the average UK property had risen by 6.3 per cent within the same period, not taking into account the whole of the south east including London.

The Bank's Financial Policy Committee gathered last week and the consensus of opinion is that the latest official data released would have been paramount on their agenda.

Later this week governor of the Bank of England Mark Carney is expected to address the nation regarding this matter.

On Thursday Mr Carney will probably put forward his plans to prevent another financial crisis being sparked by property inflation, even though the Royal Institution of Chartered Surveyors believe that the housing market is going to start cooling down anyway.

Economists and mortgage brokers are predicting a limit for the amount that borrowers will be allowed to loan in proportion to their annual incomes. With the possible new limit, and the new MMR that was introduced at the end of April, the market is already anticipating a dramatic fall in mortgage approvals.

This appeared to be verified by the Bank as it summarised,

Some lenders noted that changes introduced as a result of the Mortgage Market Review might reduce approval rates somewhat. In addition, some lenders suggested that a tightening in lending standards on large loans with high loan-to-income ratios may also push down their approval rate a little.

As it stands, reports tell us that the Mortgage Market Review is holding up home loan applications and causing a queuing jam within the system. Surely this might also have some sort of impact on the figures that have been given out.

The Council of Mortgage Lenders imply just that as they say a 'statistical fog' has arisen that can only help mar the up to date details.

The governor will chair this Thursday’s Bank Financial Policy Committee get together. Economists believe Mr Carney will need to take drastic action to help prevent applicants from taking out bigger more dangerous home loans, that could turn around and bite them in their backside at some stage in the future.

His new plans may well involve a more complicated pressurised application to check out a complete affordability test for the customer’s own protection.

Mr Carney has given strong hints only recently that the Bank of England may feel the need to raise the interest rate before this year is complete, for the first time in years.

Therefore, it will come as no surprise if his new course of action appertaining to home applicants includes making sure they will be able to afford much higher interest rates should they need to increase a lot further.

Some expectations are that Mr Carney will also choose to follow the route of the Royal Bank of Scotland and Lloyds. The banks have recently announced a restriction of a maximum of four times that of a borrower’s annual earnings for any loans that break the half a million pounds barrier.

But the Financial Policy Committee, whom the chancellor structured and gave the authority to, may feel it necessary to cap it even lower than that at possibly three and a half times.

Mr Osborne said that

the Bank of England should not hesitate to use these new powers, if they think it is necessary to protect financial stability

The BOE are scared that the record low interest rates that have motivated so many to extend the amount that they borrowed will lead to many defaulting once the rates begin to increase.

Even though more stringent guidelines have been put in place via the Mortgage Market Review ‘stress test’ should interest rates go much higher, the governor may still make banks introduce a compulsory test that shows the applicant will be able to afford repayments, should they hit at least seven per cent, which goes hand in hand with the MMR recommendation.

Another option that the FPC may choose is to make alterations to the Help to Buy scheme. The government scheme was put in place to help first time buyers which some believe has been a major catalyst for boosting property prices.

According to Nationwide property prices are running 11.2 per cent higher than the same time twelve months ago. A spokesman said,

We expect house prices to increase by around 5 per cent over the second half of 2014 with gains spread across the country

Last week Lloyds bank reported that in the twelve months leading to March this year, the government received £5.6 billion for stamp duty fees that were paid from England and Wales.