Bank of EnglandJun 20 2022

BoE axing mortgage test sends 'wrong message at wrong time'

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BoE axing mortgage test sends 'wrong message at wrong time'
REUTERS/Henry Nicholls

Today (June 20), the Financial Policy Committee (FPC) said it would withdraw the test, which requires lenders to keep a 3 per cent interest rate rise stress test in place for prospective borrowers, on August 1.

It will be up to individual lenders to decide whether they wish to change their affordability measures after that date.

The test's removal was first floated in December after being introduced in 2014.

It now leaves lenders with the Financial Conduct Authority’s 1 per cent stress test over the first five years of a new mortgage, which is still in place through the ‘Mortgage Conduct of Business’ (MCOB) framework.

The Bank of England will also keep in place its loan-to-income ratio test, which requires a bank to multiply a mortgage applicant’s income by at least 4.5 to work out how much they can feasibly borrow.

Some brokers have argued the timing of the change could not be worse, and that it could lead to an increase in house prices and prospective home buyers taking on more debt and not being able to afford their interest rates in the future.

"If lenders remove their stress test, it will undoubtedly increase demand and push prices further," Mansfield-based broker Lewis Shaw told FTAdviser.

"And at a time when people will be stretched even further, to then remove the one barrier which stops people from falling into a financially precarious position is irresponsible.

"Especially just before we run into into a new energy price cap and when food prices are shooting up."

Shaw cited ex-Sainsbury's boss Justin King, who told LBC yesterday (June 19) the "worst is yet to come" for food prices, predicting "double digit food inflation" will be around for years rather than just the 12 months set out by the central bank.

"It’s a timing thing," Shaw explained. "If the economy was on track then this change would be appropriate. But this feels like we’re adding fuel to a fire that’s not really even set alight yet."

Shaw said it is feasible that people may not be able to afford their mortgages in the future once this test is no longer in place, especially against the backdrop of a rising interest rate environment. 

"Standard variable rates can move within a short period of time by a couple of per cent. We've seen that in just the past six months," he explained.

UK households are now facing the highest base rate since 2009, with lenders' lowest two-year fixed rates for remortgages having trebled since October, according to L&C Mortgages data.

Shaw also argued the test's removal sends a message that things are "slackening off". He added: "It could lead to people becoming further indebted if they don't think taking out finance matters as much. It sends the wrong message at the wrong time."

The Bank's consultation on the test's removal received 27 responses, including from four trade bodies representing mortgage providers and intermediaries in the UK.

The Bank said the majority of responses – including those from all four trade bodies – were supportive of withdrawing the affordability test, and agreed with the FPC’s assessment that the loan-to-income flow limit and the FCA’s MCOB framework ought to provide the appropriate level of resilience. 

“Some respondents noted that the loan -to-income flow limit was the more appropriate instrument for macroprudential policy,” it said.

“The consultation feedback did not provide any evidence to suggest that removing the affordability test would have a significant impact on the mortgage or housing markets.”

'The Bank has forgotten history'

Despite support from trade bodies, other brokers were worried the test's withdrawal will lead to consumers spending money they will not have access to going forward.

"One of the solutions to what caused the credit crunch back in 2008 was to ensure that banks lent responsibly and with due diligence and fore thought. Removing the stress effectively makes that solution now redundant," said The Money Group co-founder, Martin Stewart.

"It never ceases to amaze and disappoint me how quickly we forget our history. If anything I would suggest right now, as we hurtle toward an inevitable recession with a double digit inflation set to be with is for a while, that we need more stress testing not less.

"The early days of the pandemic saw the country effectively run out of money within days. If we are assuming a stress rate of 6 per cent at some point in the future, we should also be applying that to the lending today."

Stewart said the consumer is currently spending money that they will not have access to going forward .

"That old familiar discretionary spending blanket that we have all covered ourselves in for the past 10 years could become very itchy, very soon."

Some brokers, however, reckon this change in the Bank's recommendations will not be felt as much as people might think.

"Just because the recommendations change it doesn’t mean that banks will automatically change the way they look at things, they still have a duty of care and have to be seen to be lending responsibly and have to get any changes past their own internal risk committees," said director at Private Finance, Chris Sykes.

"What this will allow is for additional discretions or innovations by lenders, perhaps it could inspire some lower stress rates for those that need it most with low income but with perfect credit and years of experience paying their rent."

The key here, Sykes said, is that the loan-to-income measures are still in place, so there are still large measures to protect borrowers and lenders.

FTAdviser has approached the Bank of England for comment.

ruby.hinchliffe@ft.com