The Bank of England's Alex Brazier says that in the current economic environment, "more regular check-ups are needed" surrounding mortgage lenders' appetite for risk. In a recent speech Brazier, executive director for financial stability strategy and risk, noted that a sharp slowing in demand from buy-to-let investors after the recent tax changes, as well as subdued credit demand from new buyers as incomes have been squeezed, has masked the effect of looser credit supply to owner occupiers.
He believes lenders are now prepared to take more risk as mortgage rates have fallen relative to Bank Rate, especially at the riskier end of the lending spectrum, sparking rising loan-to-income ratios. He raised concerns that loan-to-income ratios are now hitting up against the guards against excessive risk taking by lenders, such as limits on mortgage lending at more than 4.5 times the borrower’s income. The proportion of new owner occupier mortgage loans at loan-to-income ratios just below 4.5 has almost doubled in the past five years and a fifth of new mortgages now fall into this bracket.
Discussing possible economic shocks arising from Brexit, Brazier noted that households with high mortgage debt make cutbacks in downturns to keep paying the mortgage and that more of these households in an economy typically means deeper recessions. He explained: That’s why, when it comes to mortgages, the interests of the real economy can be served by guarding against excessive risk taking by lenders. "There is no flashing warning light here telling us to pull over urgently. There is, perhaps, the light that reminds us the car is due for a service.
He noted that developments in the mortgage market could be signs of a more generalised pick-up in risk taking, adding that when risk taking increases "it must not be at the expense of the resilience of lenders to any future downturn in the economy.
Brazier concluded: Our annual stress test provides the basis for checking that but, in this environment, more regular check-ups are needed too. That’s why, as we said in the Record of our March meeting, we intend to “re-consider the adequacy [of capital levels] in June, with a focus on the evolution of domestic risk appetite. We’ll keep standards up with the risks that are being taken.