Mortgage News
FSA warns on rate shock for tracker borrowers
The Financial Services Authority (FSA) has warned that borrowers on base rate tracker deals taken out in the last two years are most vulnerable to a rate rise.
The FSA warns in its Risk Outlook that homeowners are taking on as much debt as before the recession, leaving them vulnerable to interest rate rises.
FSA chairman Lord Turner said 28% of mortgages taken out in 2010 by 176,000 borrowers were for amounts of more than 3.5 times the borrower’s income.
The FSA recommends that the lending stress tests for 2011 require that banks should consider a peak to trough fall in GDP of 4.3% between 2011 and 2015.
The tests have actually relaxed between 2010 and 2011 with the regulator requiring banks to assume house prices will fall 20% over the four years with a peak in unemployment figures at 12.4%.
This compares to the 23% fall in house prices and 13.4% peak in unemployment that the 2010 tests demanded.
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The FSA said that the tests would ensure that banks are prepared for worst case scenarios, especially those exposed to euro-zone peripheral countries including Spain, where UK banks are more exposed to borrowers.
The report also notes that lenders and their auditors should ensure that impairments on household lending are fully recorded, including forbearance cases.