Housing under the regulatory gaze

Understandably, there are concerns about how much of a difference the new rules might make to potential buyers – particularly those at the start of their housing journey.

Most lenders should have had similar affordability criteria in place before the rules actually came into force, so there should not be too much difference to the position before MMR day. What is different though is the number of questions asked of borrowers in order to verify affordability.

Lenders will now require more evidence on borrowers’ expenditure in order to assess whether a loan would be affordable given current expenditure on essentials. While the assessment of affordability in itself is not controversial, the degree to which certain expenditures are considered essential is somewhat subjective, as is the capacity for prospective borrowers to cut back on it.

Article continues after advert

Rumoured interrogations about the required frequency of hairdressing appointments clearly fall short of the reasonableness test, but there is still the possibility to cut back on other types of spending considered essential – such as meals out or, should the need arise, reducing energy consumption in the home. Indeed the FCA acknowledges that there is wriggle room in reality by making provision for transitional arrangements to allow lenders to waive some of the affordability requirements for existing borrowers.

It is worth revisiting exactly what the rules say and then examining what this might mean in terms of affordability for a family on average earnings in the UK. Taking into account the effect on available income after tax and national insurance and essential spending, shows what is left for lenders to consider in their calculations.

Using government data on average earnings and expenditures – adjusting for tax and national insurance, current house prices and interest rates – we can assess how affordable a loan might be now and how that changes according to interest rate and mortgage-term assumptions. For a family with one child under two at nursery and both parents working full time, the mean gross average household income is about £64,500. After tax and national insurance, it falls to about £50,000 and after spending on council tax, food, transport and utilities it falls to about £35,000.

Under different interest rate and mortgage-term assumptions, the percentage of income remaining varies significantly, from 68 per cent to 46 per cent, even without varying the LTV. So it is clear quite how much of a difference the rate assumptions make, even when looking at just the basic essential expenditure.

The Financial Policy Committee has now adopted the power to be able to stipulate the interest rate lenders use in their affordability stress test. Even though it has not exercised the power, the message is clear: it has this in mind as a way to regulate the availability of credit, should it become more concerned about the pace of growth in the housing market and the threat it might pose to both consumers and the stability of the financial system.