Charts of the Week

United Kingdom: Mortgages caught between support and restriction

10/13/2020
United Kingdom: Breakdown of mortgage loans by loan value

New mortgage lending fell by 33% year-on-year in the second quarter of 2020, the steepest decline since 2008. British lenders have been more cautious since the beginning of the year. This is evidenced by the decrease of 4.0 percentage points (pp) in the share of loans with a loan to value (LTV) figure in excess of 75%; the bulk of this concerns loans with an LTV between 75% and 90% (-3.2 pp). To tackle this trend, and with Nationwide’s property price index continuing to rise, the UK government plans to boost home ownership by encouraging loans with an LTV of up to 95%.

The government’s plans might seem hard to reconcile with increased caution amongst lenders, who have also seen a significant increase in their cost of risk[1], and the associated tightening of the capital constraint by the BoE. The latter considers a possible additional capital requirement[2] and the introduction of an increase in the weighting of mortgage loans in the internal-ratings-based approach[3]. Due to come into force in January 2022, these rules will be more targeted and more rapidly applicable than the output floor, which also seeks to correct the weightings of banks’ internal models but applied to their entire portfolios.

[1] https://economic-research.bnpparibas.com/ecotvweek/en-US/United-Kingdom-Banks-face-double-challenge-Covid-19-Brexit-10/2/2020,c34491

[2] BoE (22.07.20) Speech by Sarah Breeden “Climbing mountains safely”

[3] BoE (30.09.20) CP14/20 “Internal ratings based UK mortgage risk weights: Managing deficiencies in model risk capture”

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