The proportion of new owner occupier mortgage loans at loan-to-income ratios just below 4.5 has almost doubled in the past 5 years. Almost a fifth of new mortgages now fall into this bucket (see chart 4). In part because of our guards, households’ mortgage debt servicing burdens remain very low. Only 1.4% of households spend 40% or more of their income servicing their mortgage debts. And even if interest rates were to be at 2%, that share - at 1.9% - would be no more than it has been on average in the past. 7  For example, Bunn and Rostom (2015) find evidence that more highly indebted groups of households made larger cuts in spending following the financial crisis. See www.bankofengland.co.uk/working-paper/2015/household-debt-and-spending-in-the-uk 8 A loan to income limit, setting out that no more than 15% of new mortgages can be issued at loan to income ratios of 4.5 or higher; and an affordability test, under which lenders consider whether new mortgagors could still afford their mortgage if they switched to the mortgage reversion rate and interest rates were 3 percentage points higher. 7  All speeches are available online at www.bankofengland.co.uk/speeches  7  So there is no flashing warning light here telling us to pull over urgently. There is, perhaps, the light that reminds us the car is due for a service. Developments in corporate credit, consumer credit and in the mortgage market could be signs of a more generalised pick-up in risk taking.
And the Governing Council underlined at its recent meeting that, should it become necessary to further address risks of too prolonged a period of low inflation, it is unanimous in its commitment to using additional unconventional instruments within its mandate. Thus, many of the necessary conditions to restart credit growth are now in place. Yet, I think it would be short-sighted to claim that these alone will be sufficient. Coming out of a major financial crisis, it was always clear that repairing the bank lending channel would be a longer process, and the measures I have just described would only be the first steps in that process. One of the most important issues now in the repair process is how banks adapt to the challenging business environment that has been bequeathed by the crisis. The banking sector in transition The euro area banking sector remains in transition. At present banks generally have low revenues and profitability arising from several factors, including legacy factors such as loan losses during the crisis; cyclical factors such as the weak macroeconomy; and in some cases regulatory factors such as the costs of adapting to new legislation. This is reflected in historically low returns on equity: the median return on equity for euro area significant banking groups is currently 5%. It is unlikely, and indeed undesirable, that we will see a return to the high returns on equity we saw before the crisis, which were distorted in particular by excessive leverage and maturity mismatch.