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FPC recommendations ruling over lenders’ stress test rates

Lenders will be forced to consider any Financial Policy Committee recommendations when setting their interest rate stress test rate, which is likely to fuel lenders’ fears over soaring decline rates as a result of the increased requirements.

From 26 April lenders will have to stress test borrowers’ affordability to take into account the impact of expected future interest rate increases with reference to market expectations over the next five years.

Lenders will have to stress borrowers taking out mortgages with a lock-in period of less than five years against their existing SVR plus an additional percentage – the FCA suggest the five-year forward sterling rate, which is currently about 3 per cent – to take into account future base rate movements. Lenders must assume a movement of 1 per cent minimum over the five-year period.

And now the FCA wants to add a rule which could see the stress testing requirements increase.

It has proposed a new amendment to its incoming affordability rules which means lenders will have to consider not only market expectations of a base rate increase but also any prevailing FPC recommendation when setting their interest rate stress test rate.

So, for example, the FPC may decide to make a recommendation if it considers that a stress test based solely on market expectations “understates the financial stability risks of customer entering into unaffordable mortgages”.

But the FPC is not obliged to use this power and so may not make a recommendation. The recommendations would be communicated following its quarterly meeting.

The consultation for the new proposal is four weeks with the plan being that it becomes a rule soon after the implementation of the MMR on 26 April.

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