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Chancellor says law to cap mortgages won't happen soon

The Chancellor George Osborne told those gathered at the Mansion House speeches last night that whilst the surging housing market was a concern, a law to cap the size of mortgage loans was not the first 'tool in the box', reports the BBC.

Mr Osborne and the Governor of the Bank of England, Mark Carney, were addressing attendees at the Mansion House speeches, held at the official residence of the Lord Mayor of London.

The speeches come in a year when economic growth has begun to out-perform many predictions, with figures released this week showing yet another fall in unemployment numbers.

Housing market boom

However, alongside the optimism for the future of the UK economy comes concern about the rapid acceleration in house prices.

House prices rose at their fastest rate for many years last year, with the rise in prices in London particularly reaching double percentage figures. Those looking to buy are seeing prices rise almost before their eyes, with properties fast becoming unaffordable for many buyers.

This rapid surge has led to many economic commentators predicting dark times ahead. The surge is undoubtedly being fuelled by record low-interest rates, which have remained low since the credit crunch in 2008.

Low interest rates make the cost of borrowing money cheaper, making large mortgages more affordable and driving demand for housing. However, low interest rates are not sustainable in the long term, and the Government knows that sooner or later the Bank of England will need to begin to push up interest rates.

Rising interest rates will make the cost of mortgages more expensive, which many fear will lead to many people who have borrowed money to buy a home now left with a mortgage that they cannot afford.

Mortgage cap

One solution being considered by the Government is placing a legal cap on the amount of money banks can lend as a mortgage. The legal cap would allow the Bank of England the power to impose a cap when deemed necessary.

The mortgage cap would most likely work by restricting the amount banks can lend as a multiple of total income. Mortgage lenders often lend money based on the total household income of the purchasers, multiplied by three, four or in some cases five times.

It is understood that many believe a five-times-salary mortgage is too high, and would like to see a restriction of three-and-a-half-times salary instead.

"I want to make sure that the Bank of England has all the weapons it needs to guard against risks in the housing market," said Mr Osborne.

However, commentators believe that the key to controlling mortgage lending lies in enhanced affordability testing. Last month mortgage lenders announced new rules that will see applicants for mortgage finance subjected to far greater scrutiny over their personal finances.

For the first time mortgage lenders will be asked to explain their personal spending habits, including things like the amount spent on haircuts, in order to allow the lending bank an insight into whether the mortgage application is realistic and affordable.