It is being proposed that the Bank of England should have the power to impose lending caps on the mortgage industry. These could be set industry wide or could even be lender specific.
One way of doing this would be to restrict the loan to value (LTV) that lenders can offer to borrowers. The BoE could for example impose a LTV limit of 80% across the market. That would mean that every mortgage applicant would have to have a 20% deposit. But if the BoE assess the housing market as overheating they could reduce the limit to 70%.
Sounds good in principle but would pose problems.
The BoE would have to almost be a contrarian bank. When times are good and money to lend plentiful the BoE would have to make it harder for banks to lend. This could restrict their profits or make loans more expensive. Then when times were tight the BoE would be trying to encourage lending by raising LTV limits. But would the lenders want to use the increased allowance in bad times? The government are desperate for banks to lend at the moment remember.
We all already have a hard enough time trying to predict and react to BoE interest rate setting. Putting another variable in like this may be a step too far. And I bet we’ll soon see some sort of financial instrument based on it or for betting on it.
There is also the question of how it would affect re-mortgaging.
Banks are also notoriously creative. Remember, the Northern Rock 125% LTV ‘mortgage’ was not actually a mortgage. At its most generous it was a 95% LTV mortgage in conjunction with a 30% LTV unsecured loan. So a BOE imposed LTV on a mortgage would not work in isolation. What we may see is a gradual move toward credit controls across the board.
This looks to me like more market manipulation to try and conquer ‘boom and bust’. There will always be a business cycle. The best thing to do is let it run its course. But you then have to allow failed institutions, however large, to go to the wall.
But I do like the sound of LTV limits and while we’re at it let’s have income multiple control too. But don’t make them variable with the economy, reset them once a year and impose them industry wide to cover all lending.