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Affordability review: removing barriers or creating unintended consequences – Roberts

by: Kevin Roberts, Director, Legal & General Mortgage Club
  • 11/02/2022
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Affordability review: removing barriers or creating unintended consequences – Roberts
Stepping onto the housing ladder today often means saving tens of thousands of pounds towards a deposit. But even when buyers have put enough aside for their first home, they must also prove they can afford monthly mortgage repayments.

For buyers picking two or three-year fixed-rate mortgages, that means passing stringent stress testing rules set in the wake of the 2008 financial crisis.

Those rules could soon be changing, however. In December, the Bank of England announced its plans to launch a consultation this year on a recommendation to withdraw affordability testing.

It’s a measure that several organisations in the mortgage market have called for action on for some time now, but the news of the consultation has been met with both positive and less favourable responses from the industry. So, what impact could the Bank of England’s proposed changes really have for buyers?

Breaking down barriers

The proposals put forward by the Bank of England will almost certainly help some consumers, particularly first-time buyers.

It’s no secret that stress testing rules have prevented some consumers from stepping onto the ladder. Under the current regulations, buyers must be able to prove they can afford repayments at three per cent above their lender’s standard variable rate (SVR).

First-time buyers today could quite easily find a 90 per cent loan to value (LTV) mortgage with a rate below three per cent, perhaps even lower, but regulations mean they’ll be stress tested at between six and seven per cent.

The impact of the criteria at lower rates is even more pronounced. For a borrower hoping to secure a two per cent rate on their mortgage, stress testing at six per cent represents a more than 300 per cent uplift on the interest they would actually be expected to pay over the term of the mortgage.

That’s an arguably unrealistic hurdle to overcome, and one that can be particularly frustrating for first-time buyers who may already be paying more in rent than they would in mortgage repayments.

Providing more flexibility around loan to income (LTI) ratios could also be helpful for buyers, if done in the right way.

Larger lenders must currently ensure that no more than 15 per cent of their residential mortgage portfolio exceeds an LTI ratio at or greater than 4.5 times income.

Giving lenders the flexibility to provide more mortgages at higher LTI ratios could help to open up the housing market to younger buyers with smaller deposits and who may need to borrow more. A move like this could be particularly helpful for those planning to buy in high demand, high price areas including cities, as well as regions like the South East.

Finding an equilibrium

There are, however, reasons to be skeptical about the changes.

Removing stress testing rules that were set up to protect consumers in the wake of the global financial crisis will almost certainly be a challenging PR exercise for the mortgage market.

A relaxation in regulation is no doubt likely to produce a raft of unhelpful headlines in the national press about a return to the pre-crash times, the fall of Northern Rock and ‘dodgy’ lending practices. Could that, in turn, end up putting buyers off from moving ahead with their plans?

More importantly however, we must also consider whether the consultation could create unintended consequences for the market. The Bank of England has a responsibility to ensure that everyone who can afford to buy has as much opportunity to do so, but it must also consider house price inflation.

The influence of Covid-19 and remote working on buyers, as well as the stamp duty holiday, has created a frenzy of activity in the housing market over the past two years, and this demand looks set to continue.

Legal and General’s latest report has found that as many as one in five people are still planning to relocate to a different part of the UK over the next year, including more than a third in London who are planning to move.

Any relaxation of affordability criteria could prompt a whole new cohort of buyers to enter the housing market at a time when demand has already pushed up average house prices to record levels.

Borrowers face an increase in costs beyond the housing market as well, with a rising cost of living leading to higher food bills and energy prices expected to move even higher in the Spring. This could all leave us at a point where these changes to affordability testing are negated by buyers being priced out of the market as property prices rise ever higher.

That really points me to the answer the housing market has sorely needed for so long – a homebuilding programme that ensures the delivery of thousands more new homes for buyers now and in the future.

Tackling regulatory barriers such as stress testing will certainly have its place, but it will all be for nothing if government and industry do not work together to build the thousands of homes Britain desperately needs.

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