The Bank of England has moved to avert the housing boom by proposing a cap on the proportion of home loans that can be lent at high multiples of income.
Under the proposal, lenders will no longer be able to lend any more than 15 per cent of residential mortgages at more than 4.5 times a borrower’s income.
The Bank of England’s governor Mark Carney said the housing market could be a threat to the UK economy’s stability.
Affordability checks on borrowers will also be strengthened and several key recommendations were made which include:
•Ensuring lenders check mortgage applicants can cope with a three percentage point rise in interest rates – slightly tougher than current affordability checks
•Limiting risky lending by putting a 15 per cent cap on the number of mortgages that banks and building societies can give to people who want to borrow more than 4.5 times their income
•A separate Treasury pledge that bans anyone applying for a loan through the Help to Buy scheme borrowing any more than 4.5 times their income.
Bank officials say the plans would not have an immediate effect on the current housing market, and would not suddenly harm a potential buyer’s ability to get on the property ladder.
“These actions will have a minimal impact in the future if, and it is an important if, if the housing market evolves in line with the bank’s central view,” Mr Carney told the BBC.
“The 15% cap could quickly become relevant if house prices grow more than we expect, if incomes grow less rapidly than we expect, or if underwriting standards slip.”
Mr Carney said that the Bank was acting in a proportionate and graduated way and putting in place ‘a firebreak’ on riskier lending.
Paul Smee, director general of the Council of Mortgage Lenders, told the BBC: “Nationally, nine per cent of new loans are at 4.5 times income or more, but the figure is 19 per cent in London.”
Lenders, including Lloyds Banking Group and RBS, have already limited mortgage lending to four times income for loans worth more than £500,000.
The average new mortgage for a house purchase is £135,200.
The latest official figures on the housing market showed an annual property price increase of 18.7 per cent in London, where a small proportion of buyers pay in cash.