- House hunters are taking greater financial risks to get on the property ladder
- Economists at the Bank of England are afraid of creating a major debt bubble
- The BoE said some borrowers are taking four-and-a-half times their earnings
Borrowers are stretching their incomes like never before to buy a house, the Bank of England warned yesterday.
More than a quarter of buyers are now borrowing more than four times their annual income as the long-running house prices boom forces them to take ever-greater risks.
This is the highest figure on record – and double the proportion eight years ago.
The Bank of England has warned about the risks associated with a growing major debt bubble
The BoE warned banks about house hunters trying to stretch to far to buy a new home
It has led to fears that thousands have over-reached to afford a property, fuelling a debt bubble that could cause disaster when interest rates rise. Banks are forbidden from handing out more than 15 per cent of their total mortgage lending to customers who want to borrow over four-and-a-half times what they earn in a year.
What this means in practice is that lenders are discouraged from allowing someone earning £30,000 to borrow much more than £135,000.
But the Bank of England said there has been a sharp rise in borrowing just below this level, at income multiples of between 4 and 4.5. A total of 17.65 per cent of mortgage lending in the third quarter of last year was to borrowers in this bracket. Another 10.65 per cent of mortgages went to borrowers at even higher multiples.
In 2009 the figure for borrowing at high multiples was half as high at 14 per cent.
The Bank is watching closely for signs of instability, and critics called for urgent steps to stabilise household finances.