BoE watches UK mortgage war 'like a hawk'

The price war for mortgage customers may be good news for borrowers but the result has been lenders taking greater risks, deputy governor Sam Woods said in a speech to the Building Societies Association. This was apparent in shrinking spreads over the risk-free rate and higher loan-to-value lending, he said.

"Now, it may be that these shifts are well within firms’ management capabilities, and they should be well captured by our capital framework. But we should be watching them like a hawk," Woods said.

Tesco Bank has pulled out of mortgage lending because it cannot make enough money at a reasonable risk.

Woods also said the risk attached by lenders to UK mortgages had been falling because of lower defaults and rising house prices. That meant the capital required to back a mortgage had dropped by a third and this could cause the BoE to intervene.

He told the building societies: "I think we should approach this trend with a very sceptical eye and need to consider whether there is a case to impose more floors in firms’ models – particularly given the current stretch in some measures of house price valuation."

Woods also said the BoE was keeping a close eye on leveraged lending – loans to highly indebted companies, which some analysts have argued could cause the next financial crisis. These loans have been growing fast while underwriting standards have slipped, Woods said.

"The potential risks to banks here are both direct, and indirect through the impact of corporate indebtedness on the economy," Woods said. "Compared to this, the move up the risk curve of UK lenders in the mortgage market looks rather benign. Our job is to make sure that both moves are properly managed and capitalised in the firms we regulate."