CML urges FPC to reassess 3% affordability testing

The Council of Mortgage Lenders is calling on the Financial Policy Committee to reassess the 3 per cent affordability ‘stress tests’ applied to mortgage borrowers, which it believes is having an adverse affect on the housing market.

In a news and views piece entitled ‘Macro-prudential regulation: have we got the balance right?’, the CML highlights that the last FPC consultation paper in June 2014 referred to a ‘central scenario in which house purchase approvals would now be averaging 270,000 each quarter.’ It says the latest three-month total was just 205,000 approvals.

The CML references the Bank of England’s acknowledgement, in last November’s Financial Stability Report, that material changes had been seen to interest rate expectations since mid-2014. The CML says this creates scope for the FPC to ease back on its requirement that affordability should be assessed on the basis that interest rates could be 3 per cent higher during the first five years of the mortgage.

The FPC, however, struck a different tone and signalled that it should “hardwire” its current requirements in order to help build greater resilience for borrowers, the CML points out.

“When the FPC acted in June 2014, the CML and much of the mortgage industry saw the measures as sensible, proportionate and market-sensitive, and that they would define a sustainable growth trajectory for the housing market,” the paper says

“Market activity levels since then have been disappointing, despite numerous government interventions to support first-time buyers and new build activity.”

It outlines the CML’s belief that macro-prudential policy could be re-calibrated, especially around affordability tests, “in a manner that would deliver modestly stronger and a broader mix of activity, without undermining financial stability.”

“We would encourage Bank to update and expand the housing and mortgage metrics that it monitors and publishes, to aid stakeholder understanding and challenge. Such challenge can only strengthen acceptance of its judgement-based policy actions,” the paper says.

Speaking at the CML lunch today, the last for the body which will be merged to form UK Finance in June, chairman Peter Hill was due to say: “The CML would like to encourage the Bank, or more specifically the FPC, to continue to behave in a bold and confident way towards the use of Macro Prudential tools.

“On behalf of the industry, we would now like to urge the FPC to take another look at its 3 per cent affordability test. It is the CML’s view that the Bank’s policies risk having a net adverse effect on the housing market and, rather than hardwire the current requirements as was mooted in the last Financial Stability Report, it should be looking to soften the impact. A failure to do so may unnecessarily cramp the ability of home-owners to move house and undermine the smooth functioning of our housing market.”