However, in our industry the Bank of England’s Financial Policy Committee (FPC) does not apply the same logic to those looking to buy homes.
The FPC’s housing tools have prevented our housing market from overheating, but one might reasonably ask whether negligible levels of mortgage arrears and write-downs suggest that its policy risks being heavy-handed.
Although the FPC’s rules allow lenders to disapply its three per cent stress test when the mortgage has a fixed term of five-years or more, many lenders choose not to do so to guard against conduct risk concerns that a borrower has been led towards higher borrowing.
A safe-harbour
Perhaps what is needed is a safe-harbour product that would appeal to risk-averse households who need to stretch their incomes beyond the current FPC parameters.
For example, these borrowers may have only a modest deposit, not enjoy financial support from family, or simply work or live in an expensive high-demand area.
One idea that surfaced in the Conservative Party manifesto was for a lifetime fixed-rate mortgage.
The basic premise – that the borrower fixes the mortgage rate for the duration of the term, and is able to borrow a higher loan to value (LTV) than otherwise – was mooted in the Miles Review of 2003, and seen at the time as a rational quid pro quo for the removal of interest rate risk.
Degree of flexibility
Although many of the ideas from the Miles Review were not taken up, the world has changed a lot over the intervening years.
Longer-term products are typically more expensive than short-term ones, but crucially the cost difference is likely to have narrowed significantly in today’s ultra-low interest rate environment.
The flexibility to repay early at little or no explicit cost is a key issue for consumers but this can be built into the overall mortgage pricing.
For intermediaries, a trail commission system would be needed to get them on board.
Whether lifetime fixed-rate mortgages are viable or not, the industry needs the FPC to show a degree of flexibility.
Even with the benefit of material state support, first-time buyer numbers are only increasing by about two per cent a year.
With Help to Buy ISAs ended, the population of 25-34 year olds moving gently into reverse, and the Help to Buy Equity Loan scheme scheduled to close in 2023, there is a danger we are close to the peak of first-time buyers.
Reassure the regulator
Lenders see a clear need for fresh policy action, not least to plug the significant gap that will be left when Help to Buy Equity Loan scheme expires.
At this stage, it seems likely that a smorgasbord of proposals will be brought forward, rather than a single large-scale solution.
Increasing lender appetite for higher LTV business will be a core theme, and lifetime fixed-rate products could be part of the mix.
While the Bank of England has understandable concerns about the return of high LTV lending, the story in recent years has been one of gentle evolution.
The industry sees continuing growth in higher LTVs as important to the future health of the housing market and we need to reassure the regulator that it is also consistent with macro-prudential stability.
