Lenders toughen up on risky loans

BANKS and building societies are planning to clamp down on risky mortgage lending this summer as demand for home loans soars, a report showed yesterday.

Britain’s lenders expect approval rates to fall ‘significantly’ in the third quarter of the year amid ‘a lower appetite for risk’ across the sector.

Lenders are less willing to offer loans to borrowers with deposits of less than 10pc of the value of the property, according to the Bank of England’s latest Credit Conditions Survey. They are also planning to reduce loan to income ratios after concerns were raised over the number of home buyers borrowing as much as five times their salary.

The warning of a squeeze on mortgage lending comes just days ahead of an expected move by the Bank to cool the booming housing market.

The central bank’s Financial Policy Committee looks set to outline new measures to curb risky lending on Thursday such as tougher affordability tests and possible loan to income limits. Officials have also spent recent days warning that interest rates could rise before the end of the year – pushing up borrowing costs – having been frozen at an all-time low of 0.5pc since March 2009.

The Bank said demand for mortgages has ‘increased significantly’ in recent months as the housing market recovers.

But the revival has fuelled fears of a ‘bubble’ with official figures last week showing the average price of a house in the UK rose 9.9pc in the 12 months to April led by an 18.7pc rise in London.

Banks and building societies now expect a tightening in lending’ to ‘push down’ mortgage approval rates in the coming months.

The Mortgage Market Review, which imposed new affordability tests when it was introduced in April, is also expected to have an impact.

Royal Bank of Scotland and Lloyds Banking Group have already stopped lending more than four times borrowers’ incomes on mortgages of more than £500,000.