Ray Boulger, senior manager at John Charcol, has called for The Prudential Regulation Authority to reassess stress testing whenever the base rate rises.
He argued that not every rise in the bank rate indicates an upward trend and vice versa.
On that basis affordability for borrowers shouldn’t be decreased every time there’s a base rate rise due to lenders adapting stress testing models.
Boulger said: “The Bank of England says you need to take a 5-year view of the bank rate. Just because the rate goes up or down slightly doesn’t mean it’ll will end up higher in the long-term. It would seem to be logical for the PRA to reassess the stress test every time there’s a bank rate change or make it more simple.
“I think there should be some system in place that whenever the bank rate goes up, affordability and borrowing ability isn’t automatically reduced. That should be only if the Bank of England believes rates will be going up in the long-term.
“We need to make sure affordability assessments remain valid. These rates should be kept under review.
“My best guess is that base rate will be unchanged this year but a lot will depend on what type of Brexit we get. On the basis we have a deal I think the base rate will remain unchanged. At the moment the market is factoring in the risk of a no deal.”
Payam Azadi, director of Niche Advice, said that the Bank of England gives guidelines and lenders then have to interpret their own rules.
He said: “It should be market driven rather than regulation dictating what lenders have to do.
“I think lenders have different views on this and different views on risk. I think lenders should be making that assessment and moving with that.
“Some lenders such as Barclays have revisited affordability, changing and adapting theirs several times over on residential. Each lender has their own models around that.”
Boulger said that the flexibility lenders have on stressing fixed rates on 5-years and above isn’t used by many for residential cases but is used quite a bit for buy-to-let so lenders have some flexibility they aren’t using.
He added: “I think one of the reasons for that is the rule you can’t do more than 15% of lending in excess of four and a half times income. It’s more important now as more borrowers are taking 5 – 10 year fixed term deals.”
However, Craig Calder, director of mortgage products at Barclays, said that you can cap your income multiples separately to affordability.
He said: “You can have little affordability and qualify for four and a half times income but that affordability means that you’re capping them at three and a half times income. The two are linked but you can apply one rule over the other.”