3rd July 2015
The Bank of England has warned that ‘bigger and bigger’ mortgages are stretching households whose incomes cannot keep up with the pace.
Bank deputy governor Jon Cunliffe warned that he is prepared to take action if the UK’s household debt problem gets out of hand as he fears the growing gap between debt and income.
The increase in house prices over the past year due to a housing shortage has led to households taken out bigger mortgages. The Bank has already told lenders that just 15% of mortgages could be for sums greater than 4.5 times borrowers’ incomes but in its latest financial stability report said debt relative to salaries ‘remains high compared with historical and international norms’.
In the UK, a quarter of mortgages are for more than four times the borrower’s income and the Bank believes this could rise to a third over the next two years as people are forced to stretch themselves to get on or up the property ladder.
While house prices have tailed off in recent months, experts believe it is picking back up again.
Cunliffe said: ‘Our concern is not so much about house prices – it is the chain between high house prices, prices growing faster than people’s incomes, and people having to take out bigger and bigger mortgages and the debt that families then have relative to their income growth.
‘It is that debt-to-income ]ratio] of British households that creates the risk.’
He said the Bank took action last year to restrain high income multiple loans.
‘The market cooled down last year. Prices stopped growing as fast as they have been, mortgage approvals came down. There are now signs the market is coming back up again,’ Cunliffe said.
‘We are not seeing the sort of growth in momentum was saw this time last year, but given the high level of debt-to-income we have in the UK anyway, and the ability of this market to move very fast, this is something we need to watch and that’s way we have left that insurance policy in place.’