Bank of England warnings over high loan-to-value lending

Posted by Mark Lloyd, Property Mastery Academy on 29 May 2018 | Comments

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Recently, high street banks were given a warning by the Bank of England about taking risks by selling mortgages or commercial loans that could threaten the stability of the financial system.

The central bank’s Financial Policy Committee (FPC) said there were “some signs of rising domestic risk appetite in recent quarters” as household debt starts to climb. In its regular health check of the banking system, it found almost a fifth of new mortgage lending was to customers who only just met affordability rules.

bank loan risk

High loan-to-value or loan-to-income ratios

High loan-to-value lending was commonplace before the financial crisis a decade ago. The Bank of England is obviously keen to avoid the practice returning after finding high street banks are increasingly selling mortgages on, or close to, the Bank’s restriction that borrowing should not exceed more than 4.5 times a person’s income.

As a result of lenders doing more high-LTV lending, and at cheaper rates, the FPC could instigate an increase in bank’s financial reserves, which would mean a rise in costs that would be passed on to borrowers.

Although the FPC plans to take no action as yet, it has said it will monitor the market and take steps if necessary, possibly even in June.

A record of the Financial Policy Committee meeting read: “There were some particular pockets of risk. These included risks stemming from rapid consumer credit growth and risks relating to household indebtedness and mortgage underwriting standards.”

Take advantage of fixed-rate deals

The cost of borrowing is much lower than it was before the financial crisis, and, fortunately, it’s probably going to stay that way. So rather than borrowing above affordability levels, borrowers are being encouraged to take advantage of the many fixed-rate deals on the market.

Thanks to their price and flexibility, fixed mortgages are the most popular mortgage deals on offer.

“The key question for most homeowners is not whether to fix but how long to fix for,” said Ray Boulger, mortgage expert at broker John Charcol. He reports that 85% of people currently coming through John Charcol’s doors opt for a fixed-rate loan.

With interest rates expected to rise slightly in the future, homeowners can choose whether to fix for the standard two years or more. And if you can put together a deposit that’s over 10% of the purchase price, you’ll find much better interest rates available. There are also schemes to assist first-time buyers such as Help to Buy ISAs.

“Fixed rates have been the preferred option for borrowers for some time, driven by the fact that Bank base rate has been so low and fixed rates so competitively priced. Their popularity has only been boosted by the anticipation of an increase in base rate. Many borrowers on a variable rate mortgage are now reviewing how well placed they are to deal with a hike in their mortgage payments and are as a result running for the rate protection offered by a fixed-rate loan,” said David Hollingworth, director of home loan broker London & Country Mortgages.

Check out different options

As we looked at in our article on How to Invest in Property, there are plenty of options out there, and with interest rates so low, it makes sense to take advantage of the mortgage deals on offer.

There are also not so traditional financing methods include peer-to-peer lending and crowdfunding for the serious property investor. If you’d like to find out more about the different strategies you can use to invest in property, then take a look at our latest courses or mentoring programme.

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