Comment by Chestertons
Nick Barnes, Head of Research
Twitter: @NickBarnes7

CHESTERTONS logo reverse_purple“UK households’ high level of exposure to residential mortgage debt has been with us for some time and it is interesting that only recently has the Bank of England’s FPC (Financial Policy Committee) shown interest in taking palliative action.

“The proposed new interest rate stress test (i.e. that mortgage lenders should assess whether borrowers could still afford their mortgage if Bank Rate were to be 3 percentage points higher than at the origination of the loan) is a more explicit extension of what is already contained within MMR and makes perfect sense.

“The cap on lenders new mortgages (i.e. that they should represent no more than 15% of any lender’s total number of new residential mortgages should be at or greater than 4.5 times the borrower’s income) is a puzzling proposal given that by their own admission this level of borrowing currently accounts for only around 10% of new mortgage lending and quote “should not restrain current housing market activity.” This ignores the point that it is strong housing demand in the face of weak supply which is driving house price inflation to, in the case of London, extreme highs. Moreover, if 4.5 times income and above is deemed high risk, then why not rule it out of court completely?

“More puzzling – indeed worrying – is the reference that first time buyers will not be constrained by the income multiple cap but rather that they can continue to borrow at or above 4.5 times income at the lender’s discretion (with the exception of loans secured under the Help to Buy scheme which will be subject to the cap). Whilst this segment only accounts for ca. 5% of current mortgage lending, surely they are by definition likely to be the most financially vulnerable?

“The FPC has seemingly ignored an equally important area – that of dangerously high loan-to-value ratios. Again, prudence suggests that this should be an area which should be policed more explicitly rather than relying on a general approach via the requirements of MMR.”