In the December Financial Stability Report, the Bank says it has found little evidence that points to its mortgage market recommendations creating a barrier to homeownership, and the recent reduction in mortgage availability is down to banks’ own policies rather than its affordability restrictions.
The Financial Policy Committee’s (FPC) mortgage market recommendations, implemented in 2014, are made up of the 3 per cent affordability stress test on top of the bank’s standard variable rate and the limit placed on lenders to restrict the amount of high loan to income (LTI) mortgages they can approve. Banks cannot issue more than 15 per cent of their new mortgage lending at LTIs of 4.5 times or higher.
A review of the FPC’s measures to stop borrowers from becoming too indebted to their mortgage lender is currently underway and a decision to change or maintain its recommendations will be published next year.
The review will take into consideration the fall in expectations that interest rates will rise and the widening gap between initial interest rates offered by lenders and their standard variable rates. Risks to household income and unemployment will also be investigated.
The Bank found that restriction in mortgage availability was more noticeable in high loan to value lending rather than high loan to income lending suggesting a shift in lenders’ internal risk appetites and operational challenges.
The FPC’s overall high LTI limit across the lending sector had not been reached, said the Bank.
The share of new lending at LTI multiples at or above 4.5, the level at which the FPC’s limit kicks in, increased to 10.4 per cent in the third quarter this year. The limit for individual lenders is 15 per cent.
Although a small number of lenders have withdrawn high LTI products to manage the risk of breaching the LTI limit, overall there remains room for more high LTI lending before the limit is reached.
The difference between standard variable rates and quoted mortgage rates has nearly doubled from around 130 basis points in December 2013 to around 250 basis points in December 2019.
According to the report, the current wide spread between reversion rates and the Bank Base Rate may be partly due to pressure on lenders’ net interest margins caused by the low level of the Bank Rate since the global financial crisis.
The Bank said lenders could reduce the spread by passing on less of any future increase in the Bank Rate to their standard variable rates, reducing the risk that reversion rates rise in the future.
An update on the review is expected to be announced in March.