Mortgage cap 'won't be used soon'

Mortgage lenders have said that a cap on the size of mortgage loans is unlikely to be "the first tool in the box" to cool the housing market.

Chancellor George Osborne plans to give the Bank of England the power to impose a cap on home loans related to income or the value of the house.

At present, the Bank can advise on such a cap, but not impose it.

But lenders believe new affordability tests are a bigger factor for those trying to buy a home.

The Bank also has powers already to ensure banks carry certain levels of capital, preventing any return to what most regard as the unhindered mortgage lending seen before the financial crisis.

Getting a deal

The cap was announced shortly after Business Secretary Vince Cable said he was "appalled" that some banks had been lending five times a mortgage applicant's income, suggesting a "stable level" was up to 3.5 times.

The Council of Mortgage Lenders (CML) pointed out that there was a big difference in giving the Bank the power to cap loan-to-income levels and the Bank deciding to use that power. It would not be the first tool in the toolbox to be used, it said.

Former Conservative Chancellor Lord Lawson also said it could be more of a backstop. He told the BBC that he believed this would be a "reserve power" and was unlikely to be used.

As a result, it is unlikely that this would immediately make it more difficult to secure a mortgage. Yet the cost of a mortgage would be expected to rise if interest rates go up, and this could make getting a deal trickier for some.

Affordability checks

In his speech, Mr Osborne said the Bank's Financial Policy Committee would be given the new capping power before the end of this Parliament.

"I want to make sure that the Bank of England has all the weapons it needs to guard against risks in the housing market," he said.

But Kate Barker, a former member of the Bank's Monetary Policy Committee, said she was concerned that this was transferring too much power to the Bank.

She told Radio 5 live that former Bank governor Mervyn King had not been keen on having power to regulate mortgage lending. He felt that was something politicians should decide, she said.

Borrowers now have to face stricter mortgage affordability rules, following the intervention of the regulator. This means that instead of relying on an applicant's income as a measure of their ability to make repayments, lenders must also study these applicants' expenditure.

They also check whether borrowers would be able to cope with rising rates.

There have been suggestions that this has been one factor in activity in the housing market having come off the boil in some areas in recent weeks. In some parts of the UK, the has been little sign of an overheating market.

House building

Commentators have said that the key to preventing house price booms was to build more homes.

Mr Osborne, in his speech, announced reforms to planning laws designed to increase the supply of housing. These should provide permission for up to 200,000 new homes, the government says.

He announced plans for an "urban planning revolution" which would see councils forced to pre-approve brownfield sites for housing developments.

However, shares in housebuilding companies fell in early trading on Friday following the announcement. Investors were concerned about the potential for interest rate rises, signalled in Bank of England governor Mark Carney's Mansion House speech.

The chancellor said the housing market did not pose an immediate threat to financial stability, but that if left unchecked, it could do so in the future.