In an attempt to prevent irresponsible lending, the Bank of England will impose limits on how much people can borrow.
On Thursday, the Bank announced the limits that would apparently make Britain the biggest economy to ever impose these kinds of restrictions.
From October, no more than 15 per cent of mortgages will be allowed to be given with a Loan-to-Income (LTI) ratio of 4.5. A LTI ratio is the amount borrowed compared to the income of the borrower. For example, a borrower on a salary of £50,000 borrowing £200,000 would have a Loan-to-Income ratio of 4.
Currently, 19 per cent of mortgages in London are estimated to be over a LTI of 4.5, although the rest of the country averages at only 9 per cent.
By curbing these high stakes mortgages, it is hoped that any housing bubbles will be prevented from forming and ‘bursting’ as they did in 2007 before the financial crisis.
Furthermore, borrowers may be refused if they are deemed unable to keep up with payments should the interest rate rise by 3%.
George Osborne, the chancellor, said that he “fully supported” the changes the Bank of England were bringing in. “I want to protect those who own homes, protect those who aspire to own a home, and protect the millions who suffer when boom turns to bust” he added.
