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BoE introduces limits on mortgage sizes

The Bank of England (BoE) has announced limits on the amount people are able to borrow to finance property purchases.Under the new regulations, which take effect in October, lenders will be unable to lend more than 15 per cent of residential mortgages at more than 4.5 times a borrower's income.A new affordability test is also to be introduced to ascertain whether borrowers would be able to deal with an interest rate rise of three percentage points from when the loan was originally taken out.The measures are aimed at ensuring a housing bubble does not emerge that could threaten the stability of the UK's economy.Household indebtedness does not pose any immediate risk to the economy, said the BoE's governor, Mark Carney. However, he said past experiences show how quickly responsible lending can become reckless.He pointed out that the number of high loan-to-income (LTI) mortgages has increased significantly over the past year and is now at a record high.The BoE governor said he did not expect the actions to have a significant impact on current housing market activity. Prudent lenders already conduct the tests introduced by the BoE and only around ten per cent of loans are issued with a loan to income ratio above 4.5.Mr Carney stressed the measures do not prohibit all high LTI lending, as this type of loan can be appropriate in some cases, such as for first-time-buyers.He said the rules are only likely to have a small impact unless the housing market deviates from the BoE's central view."These actions will bite if there is sustained momentum in the housing market over the coming  years that is accompanied by a further sharp increase in high LTI lending," the governor stated.According to the Council of Mortgage Lenders (CML), the BoE's rules are likely to have the biggest impact on the capital's housing market."Nationally, nine per cent of new loans are at 4.5 times income or more, but the figure is 19 per cent in London," CML director general Paul Smee pointed out. 

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