The Bank of England recently launched a consultation into dropping its current affordability stress test rules. The current system means that lenders must check that borrowers could afford the loan if interest rates increased by three per cent.
Alison Pallett (pictured), managing director of sales at LiveMore, noted that the proposal to scrap its current affordability test rules could have a significant impact on certain borrowers who have up to now been “largely limited by outdated lending criteria”.
However, she argued that this “step in the right direction” will have little impact on the over-50s market ‒ which she argued is one of the most under-served demographics by mainstream lenders ‒ as the current stress test does not apply to fixed rates of longer than five years. Given these are some of the most common products selected by later life borrowers, scrapping the test will not make much difference.
Pallett continued: “ For that reason, we’d far rather see changes to the loan to income (LTI) policy than the stress test. As it stands, lenders are obligated to cap the number of loans they offer at 4.5 per cent LTI or higher at no more than 15 per cent of their mortgages.
“This is a completely one-size-fits-all policy, and essentially a blunt instrument, which means that one borrower gets a higher multiple, whilst another identical one doesn’t – simply because the lender is at or near its 15 per cent limit.”
Pallett also pointed to retirement interest-only (RIO) mortgages, which were introduced after the LTI cap was introduced. She explained: “These borrowers can support a higher LTI multiple than a borrower where capital, as well as interest, needs to be paid. Our belief is further strengthened by the certainty of pension or retirement income to make ongoing repayments.”
Pallett concluded that regulatory changes needed to be based on “common sense, not arbitrary caps and ratios” in order to make mortgage finance more accessible for borrowers in later life.
