Bank of England borrowing limits: what does this mean?
George Osborne recently announced plans to give the Bank of England (BOE) new powers to control mortgage sizes.
This change could come into effect as early as this year, and comes in response to fears that rising house prices could seriously affect the country’s economic recovery.
If you’re wondering why the Chancellor has made this decision, and whether or not it might affect you, then look no further as we answer some of the most-asked questions.
Who could be affected?
It’s difficult to determine just how many people could be affected by this change, but it seems likely that anyone looking to get a mortgage may experience the impact should the BOE use these new powers. While lenders can already choose how much they will lend to a particular borrower, these rates may be more firmly capped by the BOE.
The amount of money you will be able to borrow could be capped at a share of your income or the value of the house you own, so borrowers may need to save up larger deposits than they do currently. Because of this, house-hunters may need to be realistic with their budgets and look for homes they can afford, rather than over-stretching themselves – which was possible during the lead-up to the credit crunch.
People looking for homes in London may come across more difficulties when applying for a mortgage than those living elsewhere in the country due to the much higher average house prices in the capital.
Why are these powers being granted to the BOE now?
These powers are being granted to try and combat ever-increasing house prices and in an attempt to prevent banks from over-lending. House prices across the country have been skyrocketing, rising more than 10% in some areas over the past year; despite the fact many homes have not seen improvements to justify this increase. This is especially the case in London, where the average price of properties has seen an annual rise of around 18%, according to a housing price index published by Nationwide.
Statistics from the Bank of England have shown that borrowers taking out mortgages worth more than three-and-a-half times their annual income and putting down deposits of less than 10% was at the highest level in quarter one of this year than it has been in five years. Alongside this, in January, February and March of this year, 27% of lending was three or more times that of a couple’s joint annual earnings.
With such a rise in house prices, the main concern is that many borrowers will be left with debts that they have no hope of repaying.
How much could I be limited to borrowing?
Although a specific level for a cap has not been set as of yet, the Governor of the Bank of England Mark Carney has expressed concern at banks offering customers mortgages worth as much as four or five times their salary. The decision as to the precise limits on loan-to-value and loan-to-income ratios will now rest with the Bank of England.
Should I be worried?
Not necessarily. Although this may sound like bad news for borrowers, it should actually protect them from over-stretching themselves financially. Because of the caps in place being based on their income and/or property value, they should only be able to borrow a sum they have a realistic chance of repaying.
Of course the borrowing limits may mean you have to save longer to get a deposit for your dream home, but it’s important to remember that this legislation should help to rein in risky lending and ensure your mortgage repayments remain affordable.
If you’re considering looking for a mortgage or remortgaging, it’s important to remember that securing any large sum of money against your home is a big commitment and you should make sure you’ll be able to keep up with the repayments. Your home may be repossessed if you fall behind with repayments.
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