Logo

Bank of England scrutinises long term mortgage lenders

PUBLISHED: 18:50 12 July 2017 | UPDATED: 12:05 13 July 2017

The Bank of England is keeping a watchful eye on the behaviour of building societies in the hope of avoiding another crash

The Bank of England is keeping a watchful eye on the behaviour of building societies in the hope of avoiding another crash

PA Wire/PA Images

PRA cautioned against a return to pre-2007 antics and warned long term mortgages could be storing up problems for the future

The Bank of England has issued a direct warning to lenders tempted by the potential profits offered by long term mortgages and risky high loan to value lending.

The speech by deputy governor and CEO of the Prudential Regulation Authority (PRA) Sam Woods had been prepared for the May 2017 Building Society Association (BSA) Annual Conference but was only published yesterday due to purdah.

Mr Wood sdrew parallels to behaviour exhibited during the mid 2000s and warned that the reason the audience of 60 plus building societies at the 2004 BSA conference had shrunk to just 44 in 2017 was because “many of those societies were unaware of, or failed to control, the risks they were taking.”

Addressing the ‘survivors’, he warned against the fallibility of short term corporate memories and urged them to remain vigilant.

He warned that squeezed net margins and increased competition between lenders has seen building societies start to seek more lucrative sources of income by widening the pool of borrowers.

Conceding that affordability has correctly been a leading factor in mortgage lending he reminded lenders that “complying with the spirit as well as the letter of the law is important.”

In particular Mr Woods highlighted the emerging trend for extending the once standard maximum mortgage term from 25 years to 35.

“Of course, increasing the term reduces the level of each monthly instalment and makes the loan more affordable in the short term,” he said.

“However, it also increases the total amount of interest paid over the life of the loan quite significantly, and it increases the possibility that the final instalments may have to be met from post-retirement income.”

He suggested lenders should be careful to only give such mortgages to those they were confident would be able to repay these mortgages in the long term.

Affordability rules are mostly concerned with the first five years of loan repayment, which he feared ‘could store up a problem for the future.’

He also highlighted that the PRA has noted some lenders had been “searching for yield by creeping up the risk curve in prime residential mortgages.”

High loan to value lending, where over 90 per cent of the property is mortgaged, increased to 4.5 per cent in the Q4 2016, up from 2.8 per cent in the same period from 2015.

Mr Woods conceded that “financial institutions will always be able to innovate faster than we are able to modify the prudential rulebook.”

He said the PRA would have to be responsive to any behaviour chances in the financial systems that “lead to perverse behaviour.”

Interestingly, the discussion of mortgage lending was under a subheading “retuning to the punch bowl?”

The phrase may have been a reference to the 1950s chairmen of the United States Federal Reserve William McChesney Martin, who claimed the job of the Federal Reserve was “to take away the punch bowl just as the party gets going,” that is, to raise interest rates once the market has reached its peak following a recession.

Interest rates are currently at a historic low, which has encouraged mortgage lending.

There has been speculation over the past week as to whether the Bank of England will vote for an interest rate rise from 0.25 per cent in order to counteract inflation.

Speculation intensified today as fellow deputy governor Ben Broadbent announced he was “not ready” to raise interest rates due to too many “imponderables” in the economy.

Property search


e.g. Oxford or NW3
Powered by Zoopla

Other Hampstead and Highgate property news

Seven ways to make sure your dahlias dazzle this summer

As dahlia societies nationwide stage their annual shows this month, expert Katie Kingett offers seven tips to success with these late summer showstoppers

Rug designer Sonya Winner, opens showroom in Dartmouth Park

Emma Rice talks to rug designer Sonya Winner about her passion for colour and her new inspirational showroom in Dartmouth Park

Inside the St John’s Wood home of interior designer, Brian Woulfe

This elegant apartment in St John’s Wood has been carefully curated by interior designer and former concert pianist, Brian Woulfe

House price gap between London and regional cities set to narrow over next two years

The property price gap between London and other cities around the UK is predicted to narrow in the next two years according to figures published by Hometrack

Tom Dixon kicks off series of architecture and design events in Kings Cross

Architecture and design discussion group New London Architecture will be hosting a series of dinners at Spiritland in Kings Cross this summer, starting with an event featuring renowned furniture, lighting and home accessory designer Tom Dixon, on Thursday, July 26.

‘The means of production are changing’ - designer Tom Dixon looks to the future

Tom Dixon, designer of iconic modernist furniture and lighting, has moved his business to a new Kings Cross HQ. Here he talks about what he learned working in the music industry, moving to the epicentre of London’s future industries and finding new creative ‘obsessions’.

New Middle Eastern antiques department opens at Alfies in Lisson Grove

One of London’s last remaining indoor antique markets, Alfies, on Church Street, has launched a dedicated Middle Eastern art, antiques and design department, spanning two floors and more than 4,000 square feet.

Eight ways to get your kids into the garden this summer

As the school holidays beckon, designer Ann-Marie Powell

shares top tips with Hannah Stephen for getting youngsters outdoors

Looking after your lawn: three essential tools

Love your lawn? So, get the right tools to help you maintain it in summer. Hannah Stephenson selects three essentials to make the job easier.

David Walliams is selling Noel Gallagher’s former Belsize Park home

Britain’s Got Talent judge and author David Walliams is selling his Hampstead home for 5.35million with Marcus Parfitt.

Column: Simon Gerrard on choosing the right area to live in

Good fences make good neighbours goes the saying, but fellow residents can have an impact on the enjoyment of your home. North London estate agent Simon Gerrard shares his tips for finding the perfect location.

Most Read

Newsletter Sign Up

Sign up to the following newsletters:

Sign up to receive our regular email newsletter

Our Privacy Policy


2018 © Archant Community Media Ltd

Terms and conditions | Cookie policy | Jobs at Archant