Making mortgages more affordable?

UK Finance has responded to the Financial Policy Committee’s (FPC) consultation on its proposal to withdraw its mortgage affordability Recommendation.

It requires mortgage lenders to assess affordability by applying an interest rate stress test to determine whether borrowers could still afford their mortgage payments if their mortgage rate were to increase by three per cent.

FPC Consultation can be found here.

We have long been calling for the removal of this affordability Recommendation, which we see as an unnecessary addition to the existing mortgage Financial Conduct Authority (FCA) Mortgage conduct of business (MCOB) rulebook requirements. This requires mortgage lenders to assess a borrower’s ability to continue making all payments due on their mortgage by assuming that their interest rate increase by at least one percent.

Consequently, we have supported the FPC’s proposals to remove the Recommendation and agreed that its sister Loan-to-Income (LTI) Recommendation should be retained. This limits the number of mortgages a mortgage lender can make at LTI ratios at or above 4.5 times to 15 per cent of a lender’s new mortgage lending in any rolling four-quarter period. The less customer-centric, more structural LTI test is in our opinion the appropriate test for the more macroprudential focus of the FPC, as it plays a more important role in limiting aggregate household over-indebtedness.

Members are fully committed to their Consumer Duty obligation which requires them to place consumers’ interests at the centre of their by-businesses. Sometimes this may involve helping customers ensure that they do not suffer the personal and financial detriment that over-extension can bring. The FCA’s MCOB stress testing requirement supports them in this objective, and it does require supplementing by the FPC’s affordability Recommendation, hence our support of its removal. With the removal of the affordability Recommendation mortgage lenders would be able to take a more refined approach to affordability testing, making them more relevant to different products in their range, customer cohorts and funding models.

Given the current uncertain economic environment, we do not believe that the removal of the affordability Recommendation would have an immediate significant impact on improving access to the mortgage market. In a more settled market, we agreed with the FPC’s own analysis that removal of the affordability Recommendation could help some customers, particularly first-time borrowers and those re-mortgagers with currently marginal affordability assessments, to access mortgage funding or to reduce the existing term of their mortgage. 

Similarly in the current environment we expect the proposed change to have very little impact on the housing market. We believe that removal could be more impactful if inflation and interest rates remain higher for longer than currently anticipated, as it would allow lenders to take a more tailored view of borrowers’ servicing capacity, and reflect.their risk appetite in relation to individual borrower cohorts and product lines, as well as assumptions about current and future market conditions.

If the FPC decides to withdraw its affordability Recommendation, it expects to do so within 12 months of making the decision. Most members would wish the test to be withdrawn straight away if the FPC decides to do so, perhaps at the next FPC Meeting in early July, albeit they would need a three-month lead time to operationalise the change. Others felt that the current geopolitical and inflationary environment could lead to borrower stress in coming months. So they saw merit in retaining the affordability Recommendation in the immediate short term by delaying a decision until the challenges the economy is currently experiencing have crystallised or subsided.