The Bank of England has called for new powers to help curb lending on the mortgage market.
Should the powers become law, the Bank will be able to impose loan-to-value (LTV) limits and debt-to-income restrictions on both residential and buy-to-let mortgages. The Bank says this would allow it to act more quickly when responding to housing risks if they pose a threat to market stability.
It's particularly interesting that it wants to have a greater say in the buy-to-let market, loans which up to now have not been regulated. The Bank wants to make sure that the income that landlords receive is greater than the interest payments on their mortgages.
At the moment the Bank of England can merely make recommendations to lenders. It currently advises lenders to ensure that loans to borrowers asking for mortgages that are more 4.5 times their income make up no more than 15% of their new lending. With the new powers it would have the authority to direct lenders to make changes to their lending policy.
No changes would be made to Help to Buy as it is deemed to be functioning as it should, according to the central bank.
Is this a good time?
The Mortgage Market Review was introduced in April, which introduced tougher lending critera. So why these powers now?
The Bank of England believes too many people with too much debt threatens economic stability. It says it is monitoring the situation.
The Financial Policy Committee was offered powers of direction back in 2012 but turned it down because it felt it would be too political.
Why it could go wrong
The Council of Mortgage Lenders (CML) has stepped in and said that it may have some issues with these new powers.
It said that directive power may be useful, namely for speed and clarity, but warns that there is a distinction between getting a power and knowing when to use it.
If the limits are too harsh it may seriously restrict mortgage availability for borrrowers.
The plans, which will be discussed in a consultation at a later date, would likely be implemented before the end of the current parliament.
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