The Bank of England’s Financial Policy Committee (FPC) has proposed stricter mortgage rules to help cool the property market.
From October, lenders will not be allowed to lend more than 15% of their residential mortgages at more than 4.5 times a borrower’s income.
The bank also plans to carry out “stress tests” to measure borrowers’ ability to repay loans even if interest rates were 3% higher than the level at the time their loan was approved.
The committee’s Financial Stability Report read: “The FPC does not believe that household indebtedness poses an immediate threat to stability. But it has agreed that it is prudent to insure against the risk of a market loosening in underwriting standards and a further significant rise in the number of highly indebted households”.
The Bank of England said: “At higher levels of indebtedness, households are more likely to encounter payment difficulties in the face of shocks to income and interest rates. This could pose direct risks to the resilience of the U.K. banking system, and indirect risks via its impact on economic stability.”
The proposals come after lenders including Lloyds Banking Group and RBS have limited mortgage lending to four times income for loans worth more than £500,000.