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Bank of England handed greater powers on mortgages


The Bank of England has been granted new powers, which are intended to enable them to help the UK economy avoid another housing bubble.

The new powers will allow the Bank to set limits on how much people are allowed to borrow when purchasing a home. They said this will be based on a ‘loan-to-income’ ratio, which is likely to be set at 4.5 times a household’s annual income.

Earlier this year, the Banks Financial Policy Committee (FPC) recommended that the government and Financial Conduct Authority put a limit on how much a person can borrow to buy a home. They said that no more than 15% of home loans should be more than 4.5 times an applicant’s income.

At the moment, only 9% of mortgages are above this limit, which suggests the housing market has not lost control over lending. However, the government has taken the precautionary measure to give additional powers to the Bank of England, to ensure that lenders do not start approving too many ‘risky’ loans.

The Bank also revealed that the Help to Buy scheme has not been a major factor in rising house prices.

Mark Carney, governor of the Bank of England wrote a letter to chancellor George Osborne that stated: "Under current market conditions, the committee assesses that the scheme does not pose material risks to financial stability."

"The scheme does not appear to have been a material driver of growth - for example, take-up of the scheme has been weak in London, where house price growth has been strongest."

He also said that the scheme only accounted for 5% of total mortgages, therefore suggesting that demand from other areas of the market has been the main driver in price growth.

Buy-to-let restrictions

The FPC has also expressed a desire for additional powers on top of the ones they’ve just been granted.

They said that they want to be able to set limits on buy-to-let-mortgages too, therefore placing restrictions on how much landlords can borrow.

The Bank has stated that they want to ensure that landlords receive more income from renting out their property, than what they would be expected to pay back in mortgage repayments.

One of the advantages of this would be that it could help to cool the housing market, by preventing landlords from gambling on large house price rises.
These new powers are currently in the process of being approved by parliament, and are expected to be granted to the bank by June 2015.

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