Bank of England warns lenders it will stop mortgages that are too risky

11th July 2014


The Prudential Regulation Authority (PRA) has said it will step in to halt home loans if it believes banks are still underestimating the risks posed by borrowers.


The PRA, the part of the regulator that supervises banks and other large financial organisations that could pose a systemic risk to the UK, has said it is keeping a close eye on mortgages following concerns over affordability and a looming housing bubble.


Last month the Bank of England, under which the PRA sits, was given new power to cap the number of high loan-to-income loans banks can provide, adding to the measures it has to stem a house price bubble if it sees fit.


Now Andrew Bailey, chief executive of the PRA, said it would be looking at the models banks use in order to judge the riskiness of a loan to ensure they are adequate. Banks whose affordability tests are deemed inadequate may have to cede power to the regulator.


‘To use models and stress tests effectively requires intensive development and maintenance by firms and a highly skilled body of supervisors,’ he said in a speech yesterday.


‘It also requires the supervisor to have credible capacity to withdraw the permission given to a firm to use a particular model if the model is considered to be inadequate or the firm has not demonstrated the capacity to use it safely.’


The warning comes following months of regulatory and political clampdowns on the mortgage market.


In April the Mortgage Market Review (MMR) was introduced that brought in more stringent affordability tests for borrowers. The Financial Policy Committee, which also sits under the Bank, was also given powers to rein in the government’s Help to Buy scheme that sees those with 5% deposits subsidised by the government through either loans or mortgage guarantees.


According to the most recent Halifax house price index the cost of the average property has soared 8.8% in the past year to reach £183,462, although the past month saw prices decrease 0.6% they were still up 2.3% over the three month period to the end of June.


The London property market has seen even bigger rises and PricewaterhouseCooper has predicted has predicted the average property in the capital could cost as much as £500,000 by next year. However, the Royal Institute of Chartered Surveyors has said the London market is ‘losing momentum’ and it expects property prices to fall within the next three months.


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