30th June 2014
Mortgage approvals dropped for the fourth month running to an 11-month in May as the introduction of tougher regulations begin to take hold.
According to the latest figures from the Bank of England, May witnessed a total of 61,707 approvals for home loans, down from 62,806 in April, 66,507 in March and a 74-month high of 75,901 in January.
In contrast, mortgage approvals had previously risen for 11 successive months to January’s peak from a low of 51,740 in February 2013 and even January’s high was below the long-term average of 84,100 a month since 1993.
Experts are now citing the introduction of the tougher affordability checks for borrowers, brought in with the City regulator’s Mortgage Market Review (MMR) in late April as being a primary cause of the slowdown.
Howard Archer, chief UK and European economist at IHS Global Insight says: “It is now very clear that the introduction of new regulations under the MMR has – at least temporarily – taken some of the steam out of housing market activity. While the MMR only came into effect on 26 April, it is evident that some banks raised their mortgage lending standards before the new regulations kicked in. These regulations put greater onus on mortgage lenders to assess the ability of potential borrowers to meet their initial and future, based on higher interest rates, mortgage payments.”
While the Bank of England also reported that net mortgage lending picked up to a near six-year high of £2bn in May from £1.8bn in April, this reflects the earlier pick-up in mortgage approvals and higher house prices adds Archer.
He says: “It is also probable that some of the recent slowdown in mortgage activity has been due to lenders getting to grips with the new MMR regulations and adapting their procedures, such as introducing more rigorous interviews with prospective borrowers and checking facts. This could make it a longer process to approve a mortgage.”
Notably the Bank of England’s credit conditions survey for June reported that “demand for secured lending for house purchase was reported to have increased significantly in the second quarter, and was expected to increase further in the third quarter”.
Last week in a bid to cool the UK’s booming property market the Bank of England recommended that lenders introduce new affordability checks linked to potential interest rate rises and limit the amount of higher risk loans offered.
In its Financial Stability Report governor Mark Carney recommended that lenders, stress-testing a borrower’s ability to repay their mortgage if interest rates were to increase by 3% from the time they took out the loan. In addition banks should also have a maximum of 15% of residential mortgages on their books where the amount borrowed is at or greater than, 4.5 times income.
Looking ahead Archer says: “At the moment, house prices still look more likely than not to see clear increases over the coming months, although it is looking increasingly probable that there will be some easing back in house price gains from the recent very strong increases.
“We expect house prices to increase by around 4% over the second half of 2014.”