Mortgage debt and home repossessions are much lower than during previous financial crises, the Bank of England governor said, emphasizing the “obligation” on lenders to support borrowers.
At a meeting on UK financial stability, Andrew Bailey told the Treasury Committee that banks are now much stronger financially than in the past.
He said: “General mortgage debt service levels are lower than they were at times in history when we had stress, before the financial crisis and in the early 1990s.
“However, I do recognize that one of the big distinctions between now and some of the points in the past is that we are in a cycle of rising interest rates.”
There are now fewer mortgages with high loan-to-value (LTV) rates, when people borrow more against the equity in their home, Bailey said.
“I think the FPC’s mortgage tools, particularly the flow cap, have beneficially limited the number of homes with very high loan-to-value ratios, which are much more likely to experience problems.”
The FPC introduced flow limits in 2014 to limit the number of high LTV mortgages to 15% of a lender’s new mortgage loans. It also introduced affordability breaks to better gauge borrowers’ ability to repay their loans.
Bailey said: “Banks now have an obligation to handle customers with payment problems in a very different way than they have in the past, so we are seeing fewer foreclosures and I would expect to see fewer in the future.
“They also have the capital resources to do it. One of the problems that we saw in the financial crisis is that the banks were absolutely against it, let alone the households”.
The governor said market conditions are “virtually” back to normal after the mini-budget wreaked havoc on the gilt market, sending mortgage rates soaring.
Average rates on two-year and five-year fixed-rate mortgages rose to more than 6% in October for the first time since 2008.
But Bailey said fixed-rate mortgages have since fallen and the “risk premium” (the higher rates of return required in countries where there is greater economic instability) in the UK interest rate environment has gone. .
But he conceded that there is “something of a hangover effect” after the turmoil late last year.
“It’s going to take some time to convince people that we’re back to where we were before,” he said.
Mr Bailey and the head of the Prudential Regulation Authority, Sam Woods, also warned the committee about the risks of the government’s proposed insurance rule reforms.
Woods said relaxing insurance regulations increases the risk of pension providers running out of capital resources, but that is “compensation” by the government.
“The way you go home is if there is not enough pension capital backing. I would say it is very likely that it will return to the public purse if that happens,” Woods said.