The share of new mortgage lending at loan-to-value (LTV) ratios above 90% is approaching pre-crisis highs, but this isn’t something the Bank of England is concerned about.
The cost of high LTV mortgage lending has fallen relative to low LTV.
Speaking at the University of Warwick, Alex Brazier, the Bank of England’s executive director for financial stability, strategy and risk, added that although banks have real appetite to lend, households don’t have the appetite to borrow.
He said credit conditions in the mortgage market are ‘easy’ and mortgage pricing is competitive.
Brazier said: “Households with more mortgage debt tend to cut back more in downturns. People do everything they can to pay the mortgage.
“During the financial crisis, the fall in consumption relative to income among UK households with loan-to-income (LTI) ratios above four was around three times larger than the fall among those households with LTI ratios between one and two.
“But the effect can be to prolong the economic pain for everyone by reducing spending, and therefore amplifying the effect on incomes and output in the economy.
“The evidence, across countries, recessions (and US states) is compelling: build-up of household debt means an economy is exposed to more severe recessions.”
Brazier added: “But the share of households with very high debt burdens is in fact very low. In a low mortgage interest rate environment, only around 1% of households face debt servicing costs of more than 40% of their pre-tax income.
“It would take a large and sudden rise in interest rates – of up to 300bp – to take that fraction of households to around it historic average.”