MMR stress test proposals could make placing cases tougher for advisers

Stephen Smith, director of housing at Legal & General said the latest CP11/31 consultation paper proposals obligate lenders to stress test affordability against both rising interest rates and a benchmark but doesn't stipulate how. So, each lender will need to create its own policy and benchmark making those tests very different, he said.

"Lenders could choose swap rates or the pricing of two-year fixed rates as a benchmark, for example, then document that policy to the regulator. But the question is how can intermediaries work with lenders and understand their lending criteria if each one has a different stress test?" said Smith.

He added: "This dialogue has a long way to go."

Under the current proposals, to avoid payment shock or destabilising current mortgage holders the regulator plans to ease current borrowers into the new affordability proposals. As such, affordability checks will have to be carried out for all new mortgage contracts and second charge loans.

However, the industry has been invited to consult on transitional arrangements, including allowing lenders to waive affordability check rules for customers with a good payment history.

Affordability checks can also be waived when rate switching between products with the same lender, changes of term, change of repayment method or adding or taking away a party to the mortgage.

Association of Mortgage Intermediaries' director Robert Sinclair said borrowers are likely to be assessed differently from lender to lender as a matter of course and asked do we want the regulator to publish a single rate and force all lenders to work with it?

"I can see both sides to this as stress testing may also add competition and become another market differentiator. At some point, the stress tests could even involve a negative figure if the rates lenders work to predict interest rates heading downwards," he said.

AMI's first working party on the MMR revealed the industry's key concerns include lack of clarity on interest-only, the timeline for the Approved Persons regime and insufficient protection for struggling borrowers in the transitional arrangements.

The CP11/31 consultation period finishes on 30 March 2012.