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The Bank of England has responded to George Osborne on behalf of the FPC stating that the HTB scheme does not pose material risks to financial stability.
BoE has replied to The Chancellor of the Exchequer, recommending that they should have further powers to enhance financial stability, by placing limits on residential mortgage lending, “by reference to loan-to-value ratios.
The FPC also published a letter to George Osborne, where according to the FPC review, the Help to Buy: Mortgage Guarantee Scheme (HTB) does not pose material risks to financial stability.
In the letter from the Bank of England, it states that the scheme has led to a return of lenders to the high, above 90 per cent, loan to value (LTV) market, with many, though not all, major lenders participating in HTB.
It also stated that volumes of lending remain small when compared to before the financial crisis. High LTV loans, including HTB mortgages, have accounted for nine per cent of new mortgages according to the review in the year to date. This is compared to roughly 25 per cent pre credit-crash.
BoE added that estimations for compensation for credit risk was estimated between low and high LTV, sufficient for banks to protect themselves against any losses they may suffer in a severe housing market downturn.
It was argued that since the launch of the scheme, data showed that HTB loans have not increased the average mortgage tenors for the high LTV market.
The letter stated: “Going forward, the risk of lenders extending loans under the scheme that stretch borrowers' affordability is curtailed both because Help to Buy loans are covered by the Mortgage Market Review and the decision to cap loans in the scheme at 4.5 times income. This will reduce the direct threat to lender resilience from loans that are particularly risky by virtue of their being both high LTV and high LTI.”
BoE added: “More broadly, borrowers who have taken out a mortgage at a high LTV have a greater chance of falling into negative equity if house prices fall and may thus find it harder to sell or refinance their property. This can be difficult for individual households, but at current volumes of lending does not pose a systemic risk.”
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