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FPC closes net on mortgage lenders bending stress test rules

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  • 27/06/2017
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The Bank of England has closed its net on mortgage lenders trying to bend the rules laid out to stress test the affordability of mortgage borrowers.

In its Financial Stability Report, the Financial Policy Committee (FPC) said ‘market contacts’ had suggested lending conditions in the mortgage market were becoming easier while competitive pressures in the market remained.

In its original recommendation for affordability stress testing, published in 2014, the FPC recommended that all mortgage lenders should assess whether borrowers could still afford their mortgages if Bank Rate were to increase by 3% during the first five years of the loan.

This measure was introduced so that the increase would feed through to lenders’ reversion rates, to result in a stressed mortgage rate in the region of 7%.

However, the Bank has found a range of approaches being applied by lenders resulting in inconsistencies across the market. To combat this, the FPC has changed its recommendation to specify a 3% increase in the lender’s current reversion rate, which for many lenders is the Standard Variable Rate.

Mortgage intermediaries said it was impossible to tell which lenders were applying a more relaxed stress test to mortgage affordability as the exact formula was hidden behind a calculator embedded on the lender’s website.

Peter Kelly, director, PJK Associates, said he had not noticed any lenders relaxing stress tests but he had seen a relaxation of the assessment of outgoings. “Some lenders are taking a more laid back view about travel costs and student loans in order to improve affordability,” said Kelly.

The FPC does not expect the change in wording to have a significant impact on the market. It found the average stress rate in quarter four 2016 to be 6.8%, and predicts this would have been 7% under the revised recommendation. Had the new wording been in place last year, it would have reduced mortgage approvals by less than 0.5%.

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