Bank of England scrutinises long term mortgage lenders
- Credit: 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.
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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.”
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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.