Prudential Regulation Authority chief executive Sam Woods has warned against 35-year mortgages as part of a wider criticism of lenders not complying with the “spirit” of regulation.
Woods said the Mortgage Market Review “rightly put affordability at the heart of mortgage lending decisions” but that “as with any rules or regulations, complying with the spirit as well as the letter of the law is important”.
He made the claims in a speech due to be given to the Building Societies Association in May but delayed until yesterday due to the snap election.
The PRA chief used the shift towards longer-term mortgages as an example of how the regulator thought lenders were playing around the edges of the rules.
He says: “By way of example, I would highlight a recent trend in increasing loan terms: where 25 years might once have been the normal maximum term for a mortgage, now 35 years or even longer seems to be increasingly common.”
Woods says increasing the term cuts monthly instalment amounts but also increases the amount of interest paid over the life of the loan.
He adds that this “increases the possibility that the final instalments may have to be met from post-retirement income.
“That should not be a problem if lenders can be confident about the availability of such retirement income, or about the scope for the borrower to downsize and use the sale proceeds to pay off the balance of the loan.
“But if lenders become too narrowly pre-occupied with the profile of the loan in the first five years (in line with MMR affordability rules), this could store up a problem for the future.”
Woods warned that this, and other, behaviour may conflict with the guidance for building societies laid out in the regulator’s sourcebook.
As a result the PRA has updated the sourcebook with new expectations on lending into retirement.
Woods also added that the PRA had noted some building societies were “searching for yield by creeping up the risk curve in prime residential mortgages”.
He said lending at LTVs of more than 90 per cent increased to 4.5 per cent of new lending in Q4 2016, from 2.8 per cent in Q4 2015.
Woods added that most building societies have mortgage indemnity insurance, to hedge against higher-LTV lending risk.
But he said the issue was broader than just mutuals: “I should make clear that I am not unduly focusing on building societies in making these examples -what we are seeing is a market-wide trend.”