Borrowers lose out from tightened mortgage affordability

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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”.