The Chancellor of the Exchequer is to give the Bank of England new powers to limit mortgage availability. There’s no certainty that they will ever be used, but if they were, what impact might that have on the Scottish market?
In his Mansion House speech last night, George Osborne said he would give the bank two new powers. The first would enable the bank to ‘limit the proportion of high loan to income mortgages each bank can lend, or even ban all new lending above a specific loan to income ratio’. The second would give it the authority to put a limit on the maximum size of a mortgage relative to property value.
The necessary legislation is due to be in force before the next general election – in other words, by May next year. I suspect that new mortgage lending rules that came in to force in April will mean that the Bank never has to use these new powers, but if it did, would it have any significant impact in Scotland?
Probably not – and here’s why.
The Bank’s first option is to limit the number of high loan to income mortgages that banks can lend. But, as the Council of Mortgage Lenders points out buyers in Scotland tend to borrow less relative to their income than others. In the CML’s latest report, it says that the mortgage for an average first time buyer in Scotland is currently 2.98 times income. That is a good deal less than the average 3.42 times income for the UK as a whole.
It is inconceivable that the Bank would introduce a limit on loan size that would bring the UK property market to a complete halt which means that any limit set on the size of a mortgage relative to income would almost certainly be significantly higher than the current Scottish average. Most Scottish buyers will never get near to that limit and those that might have done will already have had to get through the stringent affordability tests introduced in April.
The second option open to the Bank is to cap the amount that can be borrowed relative to property value. But it seems that George Osborne, at least, seems to see this as a last resort. The phrase he used in his speech was ‘And if they [the Bank of England] really think a dangerous housing bubble is developing, they will be able to impose similar caps on loan to value ratios’.
Now, a loan to value cap would have an effect in Scotland because fewer buyers here have access to large deposits amassed with family support. But it seems that the government expects the Bank to use option one first and that in itself should have effect of moderating house price growth sufficiently to make option two unnecessary.
Overall, it looks like the new rules – were they used – would have their greatest impact in London and the South East where prices and borrowing as a multiple of income have risen sharply while leaving areas with lower property prices and lower borrowing as a proportion of incomes relatively unaffected. Isn’t that what the doctor ordered?