BoE seeks to remove interest rate controls for mortgage borrowers


General view of the Bank of England in London, Great Britain on October 22, 2021. REUTERS / Tom Nicholson

Register now for FREE and unlimited access to reuters.com

Register

  • Borrowers may no longer have to budget for rate hikes
  • BoE says it’s simplifying mortgage rules, not relaxing them
  • Most borrowers will still face loan / income limits for mortgages
  • BoE plans to bring banks’ capital buffers back to pre-pandemic level
  • Governor Bailey doesn’t expect Omicron to shake up the markets

LONDON, Dec. 13 (Reuters) – The Bank of England wants to repeal a rule that mortgage borrowers must be able to afford an interest rate hike of 3 percentage points, it announced on Monday, a move that , according to lenders, could help home buyers.

The UK central bank said the requirement that most mortgages not exceed 4.5 times a borrower’s income, along with separate accessibility rules from the Financial Conduct Authority, were sufficient.

The BoE will consult in the first half of next year on the change, which it says does not represent a relaxation of standards and would preserve financial stability “in a simpler, more predictable and more proportionate way.”

Register now for FREE and unlimited access to reuters.com

Register

The current rule came into effect in 2014 during a disruption in lending regulations after the global financial crisis.

Since then, interest rates have remained close to their all-time lows, and although financial markets expect the BoE to start raising rates soon, they don’t see borrowing costs approaching levels. observed before the financial crisis.

The BoE said a drop in the long-term outlook for interest rates did not automatically mean lower risks for borrowers, as it partly reflected a weaker income outlook and meant there was less opportunities to reduce borrowing costs in a downturn.

But he said his loan-income rule was in practice stricter than controlling the affordability of rising interest rates.

Paul Broadhead, head of mortgage and housing policy at the Building Societies Association, said the change would help some first-time buyers and those in expensive parts of the south-east of England.

“(They) can clearly afford a mortgage, but are embarrassed by having to verify that they could still pay off their mortgage if rates were around 6% and above,” he said. declared.

GREATER RISK BUFFERS

The BoE also said it would increase the counter-cyclical capital buffer (CCyB) that banks must hold to smooth lending over the business cycle, to 1% of risk-weighted assets, from zero currently, as of from the end of next year. .

If the economy grows as the BoE expects, then in the second quarter of 2022 it expects the CCyB to increase to 2%, starting in the second quarter of 2023. The BoE reduced the CCyB to zero at the start of the COVID-19 pandemic to boost lending.

The 1% increase implies that UK banks must hold additional capital of £ 11bn ($ 14.6bn). However, lenders already hold more capital than the regulatory minimum and therefore will not need to raise more, even if the CCyB is 2%.

Britain’s eight biggest banks, including HSBC, Barclays, Lloyds and NatWest – with Virgin Money included for the first time – have all passed the BoE’s stress test.

BoE Deputy Governor Sam Woods said it was “business as usual” for bank dividends, meaning there is no going back to the temporary suspension of the last year due to the pandemic.

The central bank has recognized the risks to the recovery of the UK economy posed by the Omicron variant of the coronavirus.

“There are near-term pressures on supply and inflation, and there could be a greater impact of COVID on business, especially given uncertainties over whether new variants of the virus are reducing the effectiveness of the vaccine, ”the BoE said.

But Gov. Andrew Bailey told a press conference he did not believe the emergence of Omicron was likely to cause further market turmoil like that seen at the start of the pandemic.

“I don’t think we are in a situation where there is… stress around the corner in terms of markets,” he said.

The BoE’s separate monetary policy committee is due to announce its latest interest rate decision on Thursday. Investors pushed back bets on a rate hike this month amid the uncertainty posed by Omicron.

($ 1 = 0.7561 pounds)

Register now for FREE and unlimited access to reuters.com

Register

Reporting by David Milliken and Huw Jones; Editing by William Schomberg, Jane Merriman and Catherine Evans

Our standards: Thomson Reuters Trust Principles.


Comments are closed.