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The answer to the housing bubble?

The answer to the housing bubble?

Mark Carney, Governor of the Bank of England, believes the UK housing market has "deep, deep" problems. In fact, Carney is so worried about growing stresses within the British property market that the Bank may introduce yet more rules to curb mortgage lending.

One of Governor Carney's biggest concerns is that heightened demand for property is being aggravated by a lack of new homes being built. Last year, only 123,000 new homes were constructed in the UK, but over 200,000 a year are needed to cope with new households being formed. In an interview with Sky News on Sunday, Carney described this lack of new homes as the biggest structural problem within the UK housing market.

What's more Carney is worried that, buoyed by record-low interest rates and the Government's Help to Buy scheme, British borrowers may be lured into over-borrowing by taking on too much debt to buy homes.

That's why he says the Bank is considering introducing new curbs on mortgage lending in order to pour cold water on an over-heating housing market.

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Mortgage caps, not higher interest rates

During previous economic boom-times, the Bank of England has tackled rapidly rising inflation by raising interest rates. However, the fear is that raising Base Rate at the moment could damage Britain's still-fragile economic recovery.

Instead, Carney has suggested ways to make mortgages more difficult to get. These new curbs may include introducing a cap on the income multiples lenders can use when considering mortgage applications. The Governor went on to warn that such a cap could take effect as early as next month, should the Bank see the need to act swiftly.

Carney said: "The level of higher loan-to-income mortgages, ones above four-and-a-half, five times loan-to-income, potentially could store up bigger problems for the future and we need to be careful."

Getting a mortgage has already got tougher

Although Governor Carney's remarks were greeted with alarm by various lenders and borrowers, the truth is they are unlikely to have any direct impact on the housing market and mortgage demand. Far more important are new regulations which were introduced last month, aimed at reducing risks for lenders and borrowers alike.

On 26th April, the Financial Conduct Authority (FCA) introduced its Mortgage Market Review: a whole new raft of rules that make getting a mortgage much tougher. Under this stringent set of regulations to prevent risky lending, the new application process for a mortgage will be far longer and much more intrusive.

Now people seeking mortgages must provide would-be lenders with in-depth details of their income and spending habits, right down to the last penny. And these figures must be backed up by proper paperwork - no documentary evidence means no mortgage.

So with regulations already in force requiring mortgage lenders to undertake forensic analysis of borrowers before making mortgage offers, is there really any need for yet another layer of rules and regulations?

Opponents of further curbs to mortgage lending argue that, with slower, costlier (and pricier) mortgages already in place, there is no need for further restrictions on the availability of home loans. Another possibility is that the Government could end support for higher-risk homebuyers (those with small deposits) by withdrawing its Help to Buy scheme.

Governor Carney has already expressed caution on any more tinkering in the mortgage market, saying of high loan-to-income loans: "We need to be calibrated, we need to be proportionate, if we were to suggest some adjustments to the amount of these types of mortgages that banks should underwrite."

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Lloyds limits large loans

Despite concerns that further mortgage limits are not needed and would be heavy-handed, the UK's biggest mortgage lender has announced a radical change to its lending policy for high-value home loans.

With immediate effect, Lloyds Banking Group will apply a maximum income multiple of four when lending against homes valued at over £500,000. Lloyds describes this as a "targeted policy change primarily designed to address specific inflationary pressures in the London housing market". This new policy will be applied alongside the bank's usual affordability assessment.

Commenting on this new restriction on high-value home loans, Stephen Noakes, Group Director of Mortgages, pointed out that house prices in the capital are now almost 30% above the 2007 peak, which is having an impact on income multiples.

He continued:"We’re not seeing such issues across the rest of the UK and, therefore, this is a targeted response to an issue largely in the upper tiers of the London housing market. This prudent update to our lending policies is intended to manage risks to our business and for our customers."

Clearly, if the UK's number-one mortgage lender is worried about a bubble in London and in high-end properties, then other banks and building societies are likely to share similar concerns. So borrowers should brace themselves for other lenders to introduce similar limits in the coming weeks and months.

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