The Financial Conduct Authority has expressed concern about borrowers made “prisoners” by increasing affordability requirements.
The regulator has published its views on sectors across the financial services industry to go with the mission statement published today (18 April).
The watchdog has warned that as some lenders change their risk appetites or respond to regulatory change, some consumers who could once afford credit might have trouble accessing products and services.
Jonathan Davidson, director of supervision for retail at the FCA, said he was looking into the issue of borrowers who had fallen foul of tighter affordability requirements.
He said: “To some degree they are trapped and we are very concerned about that.
“We are looking at affordability given that many consumers have a portfolio of debt and we have concerns that some consumers will have stuff that looks affordable in the sense that they are servicing it and it looks credit worthy and they have very low arrears but in other parts of their portfolio they have very expensive debt.”
For buy-to-let mortgages, increasing numbers of lenders are demanding coverage of 145 per cent, up from the 125 per cent many used to ask for.
This move by lenders has reportedly been prompted by former chancellor George Osborne’s decision to restrict the amount of tax relief a landlord will be able to claim on mortgage interest to the basic rate, which came into effect this month.
Meanwhile the Prudential Regulation Authority has introduced a minimum affordability stress test rate for buy-to-let borrowers - the outside amount they would need to be able to pay - of 5.5 per cent for the first five years of the mortgage following concerns about lenders’ growth plans, and the fact they might relax their underwriting standards to meet them.
But this has prompted concerns that buy-to-let borrowers could become mortgage prisoners as they attempt to refinance deals they entered into before the tough new rules were introduced, with mortgage brokers potentially being accused of mis-selling.
The FCA has also said it will investigate the treatment of consumers with interest-only mortgages during 2017 to 2018 amid concerns many of these borrowers do not have an appropriate strategy to repay them.
Dean Mirfin, technical director at Key Retirement, said: “The FCA announcement is very welcome as we estimate around 10,000 borrowers each year, between now and 2020, are coming to the end of their interest-only terms with shortfalls.
"Around 5,000 of those are expected to have no repayment vehicle at all. Many will end up selling their homes to repay their maturing loan, when actually they didn’t have to."
damian.fantato@ft.com
