The Bank of England’s Financial Policy Committee (FPC) has recommended that HM Treasury should exercise its statutory power to prescribe two new macro-prudential measures, thereby granting the FPC powers of direction in the residential mortgage market, covering both owner-occupied and buy-to-let lending, to guard against financial stability risks from the housing market, before the end of this Parliament.
The FPC recommends that where necessary to protect and enhance financial stability, it should be enabled to direct the PRA and FCA to require regulated lenders to place limits on residential mortgage lending, both owner-occupied and buy-to-let, by reference to:
a) Loan-to-Value Ratios;
b) Debt-to-Income (DTI) Ratios, including Interest Coverage Ratios in respect of buy-to-let lending.
The FPC’s Statement sets out the rationale and supporting material for the recommendation. The FPC intends to issue a draft Policy Statement to inform Parliamentary debate. If granted these powers, the FPC will publish a final Policy Statement that outlines its approach to using them, including the indicators that it will monitor regularly.
These instruments would sit alongside the FPC’s power of Direction on sectoral capital requirements and its responsibility for setting the counter-cyclical capital buffer (CCB) rate, and complement the FPC’s existing powers of Recommendation. The FPC judges that, taken together, these instruments are necessary (and should be sufficient) to tackle risks to financial stability that could emerge from the housing market in the future, rather than indicating likely FPC policy decisions in the short term.
The FPC had identified a range of other tools that might prove useful in tackling risks from the housing market, including instruments used in some other countries, such as limits on the proportion of lending undertaken at long mortgage tenors, and constraints on the proportion of lending undertaken at particular debt-servicing ratios (DSRs) – the share of income required to meet monthly debt payments. However, although it considered that both DSR and DTI ratios should be monitored, they provided similar indicators of potential income stretch and that a power of Direction over DTI ratios should be sufficient to mitigate those risks, while additionally capturing the risks that can arise from the total debt burden increasing.
The FPC has also published a letter to the Chancellor giving its first annual assessment of the impact on financial stability of the Help to Buy: Mortgage Guarantee Scheme, including, as requested, whether the parameters of the scheme – the house price cap for eligibility in the scheme and the fee charged to lenders – remain appropriate. The FPC does not see a case for changing the fee or the house price cap on financial stability grounds at this point. In forming this assessment, the Committee was notified by HM Treasury that the fees for the scheme would remain the same for 2015, with prices set on an actuarially fair basis and according to State Aid rules.