Stepping into line with mortgage lending practices from next month, seconds providers will need to perform robust affordability assessments and stress loan repayments by an extra 3% to comply with the Financial Policy Committee’s guidance.
Alan Cleary, managing director of Precise Mortgages, said: “None of us know exactly how much business will be lost when the affordability changes take effect but a 20% market-wide drop-off seems likely.”
Lenders, under the governance of the Office of Fair Trading and operating under the Consumer Credit Act (CCA) 1974, were not required to assess the borrower’s outgoings or stress payments.
Despite the MCD deadline looming five weeks away, it is believed that some second charge lenders have yet to introduce the 3% stress test and an income and expenditure (I&E) calculation which complies with the Mortgage Conduct of Business rules.
Transparency and disclosure
Mortgage Solutions asked second charge lenders to disclose their current and post-MCD affordability practices.
Prestige, Spring, Step One, Central Trust, Together and Masthaven all declined to comment on any aspect of their current and future affordability assessments.
|Lender||Stress test for first and seconds||Will I&E calc change because of MCD?||Max LTI cap *|
|Precise||3% on each||No, already MCD-compliant||6 x|
|Shawbrook||1% on each – currently under consideration with a view to increasing||No, already MCD-compliant||6 x|
|UTB||3% on each||No, already MCD-compliant||6 x|
|Optimum Credit||Under review in response to MCD changes||Will change to using statistical modelling and supporting||No comment|
|Paragon||No comment||Already assessing full income and outgoings but calculations have become more prescriptive||No comment|
|Nemo **||2%||No comment||No comment|
*Stated loan-to-income ratios take into account the first and second charge.
Tim Wheeldon, joint managing director of Fluent Money, said: “There is business being written now that will not be written post-MCD, that’s a fact. The question of how much is down to where the lenders set their new income and expenditure calculations because there is no set formula for it.” He added that stressing the first and the second charge both by 3% was ‘hefty’.
Jonathan Davidson, director of supervision at the FCA, said when forming a view on likely future interest rates, the regulator’s rules require firms to have regard to market expectations and any existing FPC recommendations on appropriate interest-rate stress tests. He added that firms were also required to set out in their responsible lending policies how future interest rates were taken into account when assessing a customer’s ability to afford the mortgage.
Wheeldon and Cleary agreed that the regulatory changes and affordability requirements heaped onto second charge lenders and brokers would cause some to close their doors.
“Some of the smaller lenders and may struggle to find their place in the market,” said Wheeldon. “Those lenders looking to more troubled customers, if that’s where you’ve placed your business you are going to struggle to continue in that market. Anybody who’s been looking for the less creditworthy customer and those customers who are tight on income and outgoings as their entire business model will struggle post-MCD.”
Rebalancing the markets
Managing director of Positive Lending Chris Fairfax said stress testing would cause a bigger decline in secured loan lending than I&E calculations because many lenders have been using MCD-compliant calculations for some time. He predicted the decline would be only a‘small blip’ until products evolved and business began to filter through from the mainstream mortgage market.
“Pricing will improve because lenders will be allowed to charge early repayment charges (ERC) which the CCA restricts,” said Fairfax. Under the CCA the borrower must give 28 days’ notice if they want to redeem the loan and the lender can only charge the borrower one month’s interest in penalties. Product rates on seconds are more expensive than firsts because the second charge lender does not have the protection of ERCs for longer periods.
He added: “Under the new regime it would be possible to offer rates more in line with mortgage products because they can use 3% ERCs for a period of one or two years, for example.
“As rates come down it may negate the additional stress.”
Fairfax is optimistic secured lending levels will recover. “The very fact that second charges will have to be discussed as an option and we will have the chance to offer a quotation will be good for business. I would predict a small blip immediately after and then as products start to diversify and become more competitive I think the market will begin to see moderate growth.”