Date:-17-Jun-2010

Bank of England to cap mortgages

House buyers could be refused mortgages under new Bank of England powers to be unveiled by George Osborne.

The Chancellor will announce that he will hand a host of new controls to the Bank to prevent another financial crisis. The powers will mean that, for the first time in the modern era, the Bank could impose restrictions on the amount banks can lend.   

The reforms, to be sketched out in the Chancellor's first Mansion House speech in the City of London, represent a revolution for the City, since in the past banks have always had freedom to decide to whom they can lend. The Bank and its Governor, Mervyn King, would be able to prevent banks from lending too much, or to over-extended customers, if they judge that this would destabilise the economy.

The precise details of the controls the Bank is to be given will be detailed fully at a later date. However, they are likely to include restrictions on the loan-to-value ratios offered to customers. For instance, families could be prevented from taking out a mortgage for anything more than 75 per cent of the value of their home.

The collapse of Northern Rock was widely attributed to its policy of lending customers up to 125 per cent of the value of their homes – despite the inability of many to repay the loans. It is hoped that the restrictions will also curb house price booms stimulated by excessive lending.

Source: The Telegraph