Bank sounds warning over huge loans to buy homes

BORROWERS are stretching their incomes like never before to buy a house, the Bank of England warned yesterday.

More than a quarter of buyers are now borrowing more than four times their annual income as the longrunning house prices boom forces them to take ever-greater risks.

This is the highest figure on record – and double the ratio eight years ago.

It has led to fears that thousands have over-reached to afford a property, fuelling a debt bubble that could cause disaster when interest rates rise.

The Bank of England is watching for signs of instability, and critics yesterday called for urgent steps to stabilise household finances across the country.

Former business secretary Sir Vince Cable, leader of the Liberal Democrats, said: ‘This is very reminiscent of the dangerous times a decade ago when banks and building societies were lending far beyond reasonable limits.

‘It’s a symptom of the fact the housing market is seriously broken.’

Banks are forbidden from handing out more than 15 per cent of their total mortgage lending to customers who want to borrow over four-and-a-half times what they earn in a year.

What this means in practice is that lenders are discouraged from allowing someone earning £30,000 to borrow much more than £135,000.

But the Bank of England said there had been a sharp rise in borrowing just below this level, at income multiples of between 4 and 4.5, as lenders load up with customers taking on the maximum debt. A total of 17.65 per cent of mortgage lending in the third quarter of last year was to borrowers in this bracket.

This equates to 35,600 people taking out loans worth a total of £6.8billion, based on figures from the banking trade body UK Finance. Another 10.65 per cent of mortgages went to

‘Market is broken’

borrowers at even higher multiples, estimated to involve 21,500 people borrowing £4.1billion.

Borrowing at high multiples has surged. Less than 20 per cent of lending was at this level in 2013, and in 2009 the figure was half as high at 14 per cent. The Bank of England’s financial policy committee, which monitors the banking stability, said: ‘The committee noted signs of rising domestic risk appetite in recent quarters. The proportion of new owneroccupier mortgages at high loan- to- income ratios, including just below 4.5, has increased.’

The large amounts being borrowed are not having a major impact at present because the Bank of England’s interest rate is close to all-time lows at 0.5 per cent. But significant increases are expected over the next two years to combat rising inflation.

And as rates go up, families’ monthly mortgage bills will increase too.

A couple earning a typical middle-class salary of £53,000 between them who borrowed 4.4 times their income would have a mortgage of £233,200.

If they were charged the average standard variable rate, 4.73 per cent according to finance group Moneyfacts, they would pay £ 1,327 a month.

But if the Bank of England rate eventually returns to where it was before the financial crisis, the couple’s mortgage interest would go up to 10.23 per cent and they would find themselves paying an extra £830 a month.

One in six new mortgages lasts more than 35 years – almost three times higher than a decade ago.

James Daley, of the consumer group Fairer Finance, said: ‘Households are borrowing more than ever before.

‘Whatever stability we have enjoyed has been fuelled by ultra-low interest rates, and that can’t be sustainable.’