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FPC fails to apply common sense to mortgage affordability

  • 04/04/2017
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FPC fails to apply common sense to mortgage affordability
The Financial Policy Committee’s (FPC) decision to keep the affordability stress rate for mortgage customers at 3% is a missed opportunity to apply common sense, said Legal and General’s Jeremy Duncombe.

In the minutes released today of the meeting on 22 March, the FPC said its decision to ensure that borrowers could still afford their mortgages if, over the first five years the Bank rate were to rise by 3%, would remain in place. As the 3% is applied to the lender’s Standard Variable Rate this often results in an applicant’s income being stressed at 7%.

Housing market experts have been vocal about the damage the stress rate has inflicted on first-time buyers’ chances of obtaining a mortgage. Speaking at Mortgage Solutions’ event last year, Richard Donnell, research and insight director, Hometrack, said stressing a mortgage applicant’s income at a rate of 7% was turning the first-time buyer market into an 85% loan-to-value playing field.

Jeremy Duncombe, director, L&G Mortgage Club, (pictured) said the FPC’s decision was not unexpected.

“The move will do nothing to help first-time buyers who have already seen properties become more expensive due to house price inflation outstripping wage growth,” he said.

In research released by HSBC, it showed the difficult economic landscape millennials faced when looking to buy a home. In 2016, house price inflation was 7.5% compared to predicted wage inflation of 1.9% this year.

Duncombe added: “Base rates are at a record low and show no sign of increasing significantly in the medium term, so it’s disappointing to see that this can’t be recognised by lenders in the stress tests they use. Prudent lending is vital for the long-term sustainability of the mortgage market, but an opportunity for common sense lending decisions seems to have been missed.”

David Copland, director of TMA mortgage club agreed that a no change result came as little surprise.

“The outlook for interest rates has been pretty benign so I was not anticipating a change in the stress rate,” he said.

“I do not expect a reduction from the 3% rate for some time to come unless market sentiment changes substantially in favour of rates rising more quickly.”

Copland said the thought it was more likely the FPC would consider increasing the differential.

“An increase in the stress rate would mean more clients failing lenders’ affordability criteria, making life more difficult for first-time buyers and trapping existing borrowers in their own homes.”

The FPC said it would keep the decision under review.

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