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Changes to affordability stress-tests are welcome but can’t be abused

Simon Jackson

December 20, 2021

Simon Jackson is managing director at SDL Surveying

In 2014, five or so years, after the worst excesses of the pre-Credit Crunch mortgage and housing market were laid bare for all to see, the FPC introduced two changes designed to curb those excesses specifically in the lending sphere.

The number of mortgages that could be lent at loan-to-income ratios higher than 4.5 were curtailed and lenders also had to follow an affordability test, using a stress-test rate 3% higher than the rate the borrower was able to secure, in order to assess whether they could repay that mortgage should rates change.

At the time, I don’t recall much in the way of pushback against this. It might have been five years on from the ‘Crunch’ but there was no doubting its impact was still being felt, and in a way, it actually did the lenders’ job for them.

They effectively didn’t have to think for themselves on this one, which for some lenders who eventually went belly up, was not their strongest point anyway.

Now, however, that latter change around stress-testing affordability looks likely to be scrapped with the Bank of England suggesting this is not so much a ‘relaxation’ of the rules but more that they have a ‘body of evidence’ to suggest this type of stress-testing is no longer effective.

We have had these rules for the past seven years so you can imagine there might be those who think, if it ain’t broke, don’t fix it. And, I’ve already read from some commentators that relaxing lending rules, particularly for first-time buyers, will only add further fuel to the house price ‘fire’.

It’s a genuine concern and I know it comes from a ‘good place’ however there is no doubting that a significant number of potential purchasers have effectively been stopped from buying a home because of these stress-testing rules.

They are pretty inflexible to say the least and, there comes a point, where you might suggest the industry needs to be trusted to stand on its own two feet, and to set their own risk appetites within an already robust structure.

Now, others I know disagree on that. They argue that it’s because lenders were left to their own devices ‘pre-Crunch’ that we got into the mess we did, and there is plenty of evidence to suggest they were right.

However, as noted, the whole regulatory environment is now much tighter and, if the Bank believes it has the evidence to suggest the stress-testing is not effective anyway, who are we to say they are wrong.

The overwhelming consideration here for the Bank of England has likely been to what extent the existing rules have been an over-egging of the regulatory pudding. And let’s not forget, that the Bank like the FCA is not immune to political influence.

Just last month Michael Gove MP suggested lenders had been over cautious in their lending to first-time buyers and it won’t have missed your attention that this announcement follows up very quickly after that.

Gove suggested that simply building more houses – although how good we are at that is also up for debate – is not going to be the only way we bridge the housing gap, and I would certainly agree.

As always, with the housing market, you need a range of solutions all working together if you’re going to tackle some of the key ambitions, and again it’s clear that this government wants to support first-time buyers in as many ways as possible.

We’ve already seen that with Help to Buy, the Government Guarantee Scheme, and now this from the bank sets that commitment further in stone.

Overall, I’m positive about such a move. Of course, this is not an excuse for lenders to throw all regulatory shackles into the lending river and dive in without thinking of the consequences.

Far from it, but with this change, they’ll have some leeway to raise their head about the first-time buyer parapet a little bit more, and to more flexibly look at what they believe their borrowers can afford, rather than being told what they can by the regulator.

It still means they’ll have to be prudent, but a ball has been hit back into their court on this one, and I suspect the first lenders who are less than careful with their return, are going to find themselves sanctioned by the umpire.


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