Caps to loan-to-income ratios and stress tests for borrowers are among new rules recommended for mortgage lenders by the Bank of England’s Financial Policy Committee (FPC).
Under the rules, which are intended to curb household debt, only 15 per cent of a lender’s total mortgage lending could be on a loan-to-income ratio of 4.5 – that is, loans worth more than 4.5 times the borrower’s salary.
Official statistics show the average house costs £150,000, or 3.1 times the average salary.
The new limits will also apply to every single loan under the Help to Buy mortgage guarantee scheme.
The FPC said borrowers with high loan-to-income mortgages were more likely to struggle to make repayments in the face of interest rate rises or a loss of income.
It also recommended mortgage lenders apply an interest rate stress test, where borrowers would be assessed over the first five years of the loan to make sure they could still make payments if interest rates rose by 3 per cent.
The new rules will apply from 1 October but the Bank expects lenders to operate within the spirit of the guidelines until then.
Many banks and building societies responded positively to the proposal, saying they were already lending responsibly and the rules would not have a great impact.
The Financial Conduct Authority says most lenders already operate within the 4.5 loan-to-income limit, and fewer than 5 per cent of loans under the Help to Buy mortgage guarantee scheme exceed this loan-to-income ratio.
