On Thursday(26/06/14), The Bank of England (BOE) introduced measures to reduce the risk of the creation of a housing bubble. It has formed due to a rising demand in housing and not enough housing in the areas it is needed. Of course Estate Agents will deny this is a reality, but house prices are rising rapidly, especially in London.
When a housing bubble bursts, it normally contributes to the recession of an economy, with no prizes for guess what happened around the time the bubble last burst! The BOE does not want the British economy to go into another recession like the one of 2008. The new rules they are imposing will restrict banks and other establishments from giving high loan-to-income ratio mortgages to those who simply cannot afford them now or will not be able to afford them in the future when it is predicted that the interest rate will increase by 3%. This means that interest rates could be between 6% and 7%, much higher than they are now meaning they will come with large financial implications.
So what is the BOE doing?
The first rule that is being imposed is on the loan-to-income ratio. The BOE are preventing more than 15% of mortgages issued being over 4.5 on the ratio, this would be where the loan is 4.5 times greater than the combined household income.
When is it coming into place?
The new measures will come into effect from 1 October 2014. It will be across all banks and other mortgage providers whose mortgages are valued at more than £100million per year. This means that smaller lenders are exempt from the rules.
Will it be harder to get a mortgage for a first time buyer?
This set of changes will not make it that much harder but the changes introduced in April, which now means people subjected to a rigorous lifestyle quiz, mean it is a lot harder now to get a mortgage than 12 months ago. However, this will mean that banks will not be offering mortgages to people 5, 6 or even 7 times greater than their income. The key to securing a mortgage is having a larger deposit to place on a house.
What is the percentage now that is over 4.5 on the loan-to-income ratio? What is the average ratio on mortgages?
Currently, only 11% of mortgages agreed across the whole of the UK are over 4.5 times the income. The BOE say that the average ratio of loan-to-mortgages at the moment is 3.4. This might not sound like a lot, and that what they are introducing is much of a waste of time, but it is being introduced to try to prevent what experts fear. It is expected that house prices will rise as much as 20% over the next three years according to the banks central prediction. This would mean very soon many first time buyers trying to get mortgages that are much higher than the average of the current day. Since the world cup is on, it seems appropriate to use the cliché that attack is the best form of defence as the BOE are trying to act now to prevent the problem occurring in the future rather than reacting to the situation it has left behind.
The BOE is trying to protect Britain’s economy as well as people who are taking out mortgages. The Chancellor, George Osborne has said that his help-to-buy scheme will not be allowed for anyone who is applying for a mortgage over 4.5 times their salary. There have been calls for a blanket ban on so called high loan-to-income mortgages, and the chancellor has even given the BOE the power to do so; however they decided to stop short of that.
By Owen Cain at Tax Affinity Accountants
Tax Affinity Accountants are experts in Tax and Accountancy. Based in Kingston upon Thames they are considered to be experts in all types of Property Accounting and Tax issues. Helping and supporting businesses and individuals throughout the UK.
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