View more on these topics

Borrowers lose out from tightened mortgage affordability

Bank-of-England-BoE-Building-Horse-700x450.jpg

Consumers are set to lose out from the recent Bank of England decision to tighten mortgage affordability rules, experts say.

The Bank said last week that lenders should test affordability by considering how borrowers would handle a 3 per cent increase in firms’ standard variable rates.

Previously lenders assessed affordability by checking how homeowners would react to a 3 per cent increase in base rate.

The Bank says the old test led to a “lack of consistency across the market” because lenders employed different stressed interest rates to test affordability.

Some lenders use more relaxed tests than others and can therefore lend sums to borrowers that would fail other lenders’ affordability tests.

The Bank’s existing rules are open to interpretation and some lenders have been stress testing borrowers at 3 per cent above the initial mortgage rate instead of 3 per cent above their SVR.

The former Council of Mortgage Lenders, now UK Finance, says the Bank’s latest move will rule out some borrowers from getting on the property ladder.

Mortgage Product Board (the mortgage arm of UK Finance) head of member & external relations Sue Anderson says: “The potential for a less accessible market for those on the cusp of the margins of the stress testing is there.

“I don’t think it is a surprise given that the Bank has been making noises about affordability on the consumer credit side, but it’s not something that lenders would have seen as necessary.”

Association of Mortgage Inter­mediaries chief executive Robert Sinclair says: “There will be a series of customers where currently a lender would say mortgages are affordable but now it will be the case that they’re not.”

Retirement Advantage says the Bank’s move could harm older borrowers. Retirement Advantage Equity Release head of marketing Alice Watson says: “The Bank of England’s decision to tighten affordability rules, albeit for sensible reasons around ensuring a more consistent approach across the market, will concern some older borrowers.

“Typically, customers approaching retirement find it harder to secure a new mainstream mortgage because their income may be lower or more inconsistent. More stringent assessments could make it even harder for those customers to get a mortgage.”

Around 0.5 per cent of all mortgage approvals in 2016 would not have met the requirements of the new rules.

The Bank says some lenders will have to increase their ICRs as a result of the new rules, although it expects the overall impact on mortgage lending to be small.

But the Bank’s decision to stress on SVR levels has been questioned by some because it will subject certain borrowers to a higher affordability test.

Maxwell Moore director and former Dudley Building Society head of credit Jonathan Moore says: “Most borrowers won’t go near an SVR. So is making them go through a process that stress tests them against the SVR the right thing?

“There will always be some borrowers who do go onto SVR. For those, it probably is the right approach. The trouble is it’s going to penalise those that won’t go onto SVR in the future.”

The Bank unveiled the proposals in last week’s Financial Stability Report, which says: “Lending conditions in the mortgage market are becoming easier and competitive pressures in the market remain.

“So there is a risk that lenders loosen the standard at which they test affordability, especially if there is significant scope for interpretation of the policy.

“The new recommendation promotes consistency of implementation across lenders and insures against the risk of loosening underwriting standards.”

In April, the CML called on the Bank’s Financial Policy Committee to reassess the 3 per cent affordability stress test altogether, arguing it harmed the housing market.

At the time, CML chairman Peter Hill said the tests needed “softening”.

Recommended

Bank-of-England-BoE-Clock-700x450.jpg
2

Bank of England tightens mortgage affordability rules

The Bank of England has tightened mortgage affordability rules to prevent loosening underwriting standards, which it warns will cause some lenders to raise interest cover ratios. The Bank formerly said that lenders should test affordability by checking how borrowers would react to a three per cent increase in base rate. But the new rule says […]

barclays-building-2012-700x450.jpg

Barclays tweaks residential and BTL affordability criteria

Barclays is changing its residential and buy-to-let affordability policies around annual bonuses,  pension contributions and child benefit. The lender is removing its £75,000 minimum income threshold for using annual bonus in affordability. Applicants must have a combined total annual bonus income of greater than £10,000. For Barclays’ premier and wealth customers the annual bonus used […]

Bank-of-England-BoE-Building-Horse-700x450.jpg

May mortgage approvals static as remortgaging rises: BoE

Mortgage approvals for house purchase edged up 0.2 per cent month-on-month to 65,202 in May, according to the latest figures from the Bank of England. The figure for last May was 66,477. Anderson Harris director Jonathan Harris says: “Approvals for house purchase are broadly stable although remortgaging continues to rise as borrowers take advantage of […]

Frexit & contagion risk in Europe

Many commentators have suggested the UK’s exit from the European Union will trigger a domino effect, leading to its eventual break-up. Neptune Head of European Equities Rob Burnett discusses the likelihood of this happening. Click here to read more Important informationInvestment risks Neptune funds may have a high historic volatility rating and past performance is […]

Newsletter

News and expert analysis straight to your inbox

Sign up
Comments
  • Post a comment
  • Carl McGovern 4th July 2017 at 2:05 pm

    It would be interesting to see, what the arrears books are like for each lender and test if the more generous are significantly higher than the more stringent. If there is a trend then fair enough, but why fix something that at the minute isn’t broken?