The Council of Mortgage Lenders (CML) has urged the Bank of England (BoE) to ease its affordability tests after analysis showed they could be holding back buying activity.
In 2014, the bank’s Financial Policy Committee (FPC) introduced a requirement that affordability should be assessed on the basis that interest rates could be 3 per cent higher during the first five years of a mortgage.
The aim of the policy was to ensure growth in the housing market remained sustainable, but the CML believes it could be responsible for a significant drop in purchasing activity.
Speaking at the CML’s annual lunch on Friday (21 April), chairman Peter Hill told delegates: “We would like to urge the Financial Policy Committee to look at its 3 per cent affordability test.
“There is a risk of a net adverse effect on the market, and rather than hardwire requirements it should be looking to soften the impact.”
The central scenario in the FPCs consultation paper, published in June 2014, predicted house purchase approvals would now be averaging 270,000 each quarter - yet the latest three-month total is only 205,000.
The CML believes the bank’s measures have made it harder to transact for older borrowers and for households with single incomes.
Pointing out that higher loan-to-income activity is now more common among younger home-movers and households with two incomes, it added the FPC “may be limiting credit risks at the expense of shrinking overall activity and contributing to a less diverse cohort of borrowers”.
The BoE is to review its housing powers later this year, and with interest rates at a historic low of 0.25 per cent following the Brexit vote, the CML has urged it to consider changing its affordability tests to support “a modestly stronger and broader mix of activity” in the market.
simon.allin@ft.com
