Softer rate outlook does not justify easier mortgage rules: Bank of England

LONDON (Reuters) - Reduced market expectations of a big rise in interest rates do not mean the Bank of England should loosen rules designed to stop mortgage borrowers getting into difficulty, central bank regulators have agreed.

Volatility in bond yields - as seen after the election of Donald Trump as U.S. President - suggest the BoE should take a cautious approach, and also ensure borrowers can cope with other shocks such as a rise in unemployment, regulators said.

Last week the central bank said it was not changing the mortgage rules set up in June 2014 to stop risky borrowing, and on Tuesday the central bank published more on why in a record of the November meeting of its Financial Policy Committee.

One of the rules requires British borrowers to be able to cope with a 3 percentage point rise in their mortgage rate before taking out a loan.

At the time when the rule was introduced, markets expected BoE rates to rise by 2.25 percentage points over the next five years, but in November they priced in a rise of just 0.75 percentage points.

"The committee discussed whether this should prompt a change in the interest rate stress test," the record of their meeting said. One argument against was that "relying too heavily on market yields would be imprudent, given that market prices were volatile ... as evidenced by the sharp increases in sovereign yields that had followed the U.S. election result."

Some policymakers also said home-buyers were likely to find it easier to borrow anyway as lenders would lower their mortgage rates, even if the BoE did not loosen its own rules.

The BoE said the proportion of mortgages that were rejected had not changed significantly since it introduced its policies, but they may have stopped a deterioration in lending standards.

Last week the BoE released a half-yearly report on financial stability and said risks had risen following Donald Trump's unexpected victory in the U.S. presidential election. It also pointed to dangers from rapid Chinese credit growth or a chaotic British departure from the European Union.

The rest of the record stuck very closely to the message in the report, with no sign of disagreement on the FPC, which includes a mix of Bank of England staff, the head of Britain's Financial Conduct Authority and independent external members.

(Reporting by David Milliken and Huw Jones; [email protected]; +44 20 7542 5109)

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