The Bank says that with prices rising faster than mortgages there could be rising debt levels and the economy could be at risk if interest rates rise and home owners struggle to keep up with their mortgage payments.
The Bank's deputy governor, Sir Jon Cunliffe, said he is prepared to step in if the debt mountain gets out of hand in the bank’s latest financial stability report.
'Our concern is not so much about house prices, it is the chain between high house prices, prices growing faster than people's incomes, and people having to take out bigger and bigger mortgages and the debt that families then have relative to their income growth,’ he explained.
Bank took action a year ago amid similar concerns and put a debt to income limit on mortgage lending. While the market cooled in the second half of the year it is now rising again on a steady basis.
‘Prices stopped growing as fast as they have been, mortgage approvals came down. There are now signs the market is coming back up again. We are not seeing the sort of growth in momentum we saw this time last year, but given the high level of debt to income we have in the UK anyway, and the ability of this market to move very fast, this is something we need to watch and that's why we have left that insurance policy in place,’ Cunliffe added.
But his comments come at a time when mortgage lending is still low compared with historical averages and experts have voiced concerns about certain sectors in particular are seeing fewer loans available, for example first time buyers who are crucial to the health of the housing market.
Indeed, a new analysis in the latest edition of the Genworth/Moneyfacts mortgage tracker report says that new product launches and falling interest rates are masking a growing crisis in high loan to value (LTV) mortgage lending.
Despite more products being offered at record low prices, Genworth’s analysis of government and industry data suggests this part of the mortgage market is rapidly falling back into decline.
It reveals that with total 95% LTV lending down by £147 million year on year in the first quarter of 2015, average lending per product has dropped by 38% over the same period. This has contributed to a 10% fall in first time buyer numbers which means that 10,400 fewer people have succeeded in buying their first home so far in 2015 than was the case last year.
It also points out that new products come with extra price premium despite rates hitting record lows. The Tracker shows the number of products available to house buyers with a 5% deposit hit a post-recession high of 195 in March 2015, before dropping back to 180 in May 2015.
Genworth’s analysis also reveals that the wider product range is failing to result in greater access to high LTV loans. Lending between 90% and 95% LTV in the first three months of the year was down 26% on the previous quarter and down 10% year on year as the Mortgage Market Review (MMR) and Financial Policy Committee (FPC) controls weighed down on the market.
As a result of the squeeze on mortgage finance, total first time buyer loans in the first four months of 2015 were down by 10% to 83,800 compared to 93,400 a year earlier. The average LTV also dropped from 83% to 82%, leaving the average first time buyer to put up an 18% deposit rather than benefit from greater availability of products needing a 5% stake.
‘Saving more than a 5% deposit is not achievable for many people, so falling rates and a rise in the number of 95% LTV products, from building societies in particular, should be signs of better things to come for first time buyers. But these trends do not present the full picture in a climate where regulatory pressures are weighing heavily on lenders and limiting their capacity to offer traditional first time buyer loans,’ said Simon Crone, Genworth vice president.
‘It seems new products and price cuts are helping lenders to compete over a smaller pool of borrowers rather than driving a genuine recovery in the high LTV market. If this is the reality of life under the new regulatory framework, then we must be grateful for the Help to Buy mortgage guarantee as the downward trend could be far worse without this stimulus in place,’ he explained.
‘Greater product choice is of limited benefit if the majority of first time buyers are still left out in the cold. The only way to make more loans available without risking the stability of the financial system is through a permanent system of private mortgage insurance and capital relief for lenders. The Help to Buy experiment has taken us part way there, but efforts must now focus on a permanent extension to the scheme that does more than keeping first time buyers out of the depths of despair,’ he added.
