Following the Financial Policy Committee’s (FPC) confirmation of the withdrawal of mortgage market affordability test, Perenna, a new bank applicant aspiring to offer long-term fixed-rate mortgages, and Habito, the digital mortgage broker, lender and conveyancer, put forward their views.
Under the previous measures – now in place until 1st August 2022 – for fixed rates shorter than five years, mortgage applicants must undergo a ‘stress test’ to ensure that the borrower is able to pay their mortgage at 3% above their lender’s reversionary rate.
Mortgage lenders that originate above £100m a year, are also limited to providing 15% of their new lending at a 4.5 loan-to-income ratio or higher.
This loan to income (LTI) ‘flow limit’, will not be withdrawn and will continue to be used, alongside the wider assessment of affordability required by the FCA’s Mortgage Conduct of Business (MCOB) responsible lending rules.
Habito and Perrena’s joint response to the FPC’s consultation in May, noted that while both firms are supportive of measures that address excessive leverage in UK mortgages, the measures as they were, were not fit for purpose when viewed against customer needs.
Perenna and Habito’s view was that a review of the LTI flow limit would provide opportunities for lenders to develop products for underserved areas of the UK population such as first-time buyers and later life borrowers, who often require higher LTV and LTI products.
Habito and Perenna put forward two recommendations to the FPC, that would meet the FPC’s objectives, while also driving better outcomes for consumers:
- Remove the 3% stress test and also revise the LTI flow limit exemption that currently applies to all lenders with annual originations of £100+ million (which limits them to 15% of their annual lending at more the 4.5 LTI) to apply to only those who originate at least 2.5% of UK gross annual mortgage lending, or;
- Remove the LTI flow limit completely but retain the 3% affordability stress test for loans with a fixed-rate term of less than five years.
