FPC proposes withdrawal of mortgage affordability recommendation

Under current rules, mortgage lenders assess affordability by implementing an interest rate stress test. This enables them to see whether borrowers could still meet their mortgage repayment if the rate was to increase by three percent. 

UK Finance supported the proposals, stating it had been calling for this affordability recommendation to be removed. It sees it as an unnecessary addition to the existing Mortgage conduct of business (MCOB) regulations as stipulated by the Financial Conduct Authority (FCA). The MCOB applies the stress test, assuming interest rates rise by at least one percent.

The affordability test’s sister Loan-to-Income (LTI) recommendation should be retained, according to both the FPC and UK Finance. The LTI limits the number of mortgages a lender can make at LTI ratios at or above 4.5 times to 15% of a lender’s new mortgage lending in any rolling four-quarter period. 

If the FPC goes ahead with withdrawing the affordability recommendation, it would do so within 12 months of making the decision.

Ray Boulger, senior mortgage technical manager at lender John Charcol, said: “The Bank of England and the Government have both in the past highlighted the benefits of long-term fixed rate mortgages and clearly a higher stress rate does not need to be applied to any mortgage where the rate is fixed for life.

“Any relaxation of mortgage lending is likely to have some impact on increasing house prices. The end of the Help to Buy scheme in March next year will have the opposite effect, another reason for introducing changes early next year.”