In official legislation published 02 February, the Bank of England (BoE) has been given greater control of residential mortgages, excluding buy to let products.
Setting loan-to-value (LTV) limits and debt-to-income (DTI) limits for residential mortgages are amongst the new powers granted to the BoE’s Financial Policy Committee (FPC) with buy to let products to be consulted on separately by the Treasury early in the new parliament.
Prevent future instability
The new legislation sets out new powers of direction which were called for by the FPC back in October 2014 in order to “guard against any future risks to financial stability”.
The changes will allow the BoE to inform banks of the proportion of loans they are authorised to hold above a specified level of LTV but will not affect buy to let mortgages.
The Treasury intends to consult on the FPC’s recommendations regarding this portion of the market separately; building an in-depth case on the way in which the running of the buy to let housing market “may carry risks to financial stability”.
Andrea Leadsom, Economic Secretary to the Treasury, claimed the FPC is taking this action in order to ensure a continuation of the ongoing stability of the country’s housing market.
This will be achieved through the setting of limits on DTI and LTV ratios for mortgages and by giving the FPC greater jurisdiction.
Currently, the FPC only has the ability to recommend these policies but the Government has made it clear that it is eager to give them the power to effectively safeguard the stability of the UK’s financial system.
Stronger and safer finances
Today’s announcement follows a separate Treasury consultation held on granting the BoE extra powers to address emerging risks to financial stability which are posed by the housing market or excessive leverage within the banking system.
The Economic Secretary explained the reasons behind the changes by saying:
“Building a stronger and safer financial system is a key part of our long term economic plan. That’s why we put the independent Bank of England back at the centre of ensuring emerging risks to financial stability are identified, monitored and effectively addressed.”