Rob Clifford is chief executive of CENTURY 21 UK
There has been plenty of media and industry noise recently – and we can’t even blame it on the weatherman. Speculation regarding the Bank of England’s appetite for further FPC-led intervention in the mortgage market had been rife in recent weeks.
Many felt that the significant changes introduced by the MMR should be given more time to bed in and all players in the market would benefit from a period of stability rather than endure further intervention which is bound to create disruption. However the Bank, and notably Governor Mark Carney, was obviously of a different opinion judging by the proposals announced in its most recent Financial Stability report. C’est la vie.
As you will know these proposals are two-fold. One is an affordability stress test – slightly shifting the MMR parameters– whereby lenders must now establish affordability if BBR is 3% above where it was when the loan was originated.
The second is a proposed loan-to-income (LTI) cap whereby lenders are not permitted to have more than 15% of their new residential mortgages at greater than 4.5 times income. These measures are likely to be introduced in October this year however the Bank expects lenders to begin operating within the spirit of the proposals straight away.
So, what impact will this have? The Bank itself has been rather candid in this announcement, saying quite rightly that these measures will probably have very little (or any) impact on today’s UK’s mortgage/housing market.
However, should house prices continue to rise Carney suggested that within a year many lenders could well be hitting that 15% level on their new mortgages. We should also not forget that products such as straight-swap remortgage and buy-to-let are not subject to the cap.
While these are national measures it seems patently obvious that the real focus is on London, and to a lesser extent, the South East.
The reason for this is simple, as the CML pointed out in quarter one this year, 9% of all new residential loans completed in the UK were at or above the 4.5 times income mark for borrowers, however, this figure rises to 19% in London.
The Bank certainly feels that large numbers of London borrowers could potentially over-stretch themselves in a market which is seeing double-figure house price inflation.
Will the market see a material reduction in mortgage volumes because of such measures? The Bank of England certainly doesn’t expect this to happen in the short-term and neither do I. Lenders and other commentators strongly agree.
This is because MMR has already played a significant part and lenders pre- and post-MMR have been applying affordability controls and assessment measures – some lenders pointing out that they have been doing so for years.
As head of mortgages at NatWest/RBS, Lloyd Cochrane, put it: “We [already] apply what we believe is a prudent test of customer affordability across all residential mortgages, at a stressed interest rate of 7%, and have done for more than five years. It’s vitally important that we help our customers ensure they can afford their mortgage today and in the future.”
In other words it won’t significantly change what most lenders are already doing – particularly in a post-MMR world. Therefore, while this is something of a significant moment in the ability and appetite of the Bank/FPC to intervene in the mortgage market it will make very little difference to transaction volumes.
Advisers have already had to contend with tighter affordability evidencing by lenders and this is the new ‘normal’ – certainly the stress testing of affordability is an understandable and sensible intervention.
It is one that is not going away and therefore all advisers should be supporting their clients to ensure they are aware of each lender’s ‘peculiarities’ and requirements.
Whilst the sector has endured a regulatory rollercoaster over the years and needs no more distraction, who could argue that stress-testing of mortgage repayments is anything other than a wise approach.
Our industry might not welcome more external intervention but this feels like a well-intended tap on the shoulder which needn’t get in the way of sustainable market growth.