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Habito and Perenna say current affordability stress test and LTI limit ‘not fit for purpose’

  • 11/05/2022
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Habito and Perenna say current affordability stress test and LTI limit ‘not fit for purpose’
Habito and Perenna have said current measures set by the Bank of England’s Financial Policy committee, including the affordability stress test and loan to income (LTI) limit, are not “fit for purpose” set against consumer need and call for urgent change.


The Bank of England launched a consultation on withdrawing the affordability stress test earlier this year, which states that lenders should ensure borrowers can afford their mortgage if it is three per cent above their reversionary rate.

It said that it would keep the LTI limit, which outlines how much a borrower can borrow relative to income. It typically stands at 4.5 per cent, though lenders can extend this to 15 per cent with new mortgage lending.

The measures were introduced in 2014 by the Bank of England’s Financial Policy Committee (FPC) to strengthen mortgage underwriting standards and guard against increased household debt.

The firms said that current measures were “not fit for purpose when viewed against customer needs”.

They explained that a review of the loan to income (LTI) flow ratio would give specialist lenders opportunities to develop products for underserved markets for those who may need high LTV and LTI products, such as first-time buyers and later life borrowers.


Proposed changes


The companies have put forward two recommendations. This includes implementing the FPC’s proposal to remove the three per cent stress test, and review the LTI ratio exemption to apply to lenders who originate at 2.5 per cent of annual gross mortgage lending

The other is to eliminate the LTI ratio completely but keep the three per cent affordability stress test for loans with a fixed rate term of five years or less.

The companies said that either action would improve competitiveness in the mortgage market, even the playing field for specialist lenders and high street lenders and improve customer choice.

Alan Fitzpatrick (pictured), vice president of lending operations at Habito, said that house prices had “increased substantially” and many prospective homeowners had not been able to keep pace as the “lending landscape hasn’t moved far enough forwards”.

He pointed to research done by the firm, which showed that 54 per cent of UK homeowners had been limited by what they could borrow for a mortgage, even if they could afford to pay more.

“Our affordability recommendations come at a time when interest rates are rising, the cost of living is top of mind and we simply need better and more sophisticated ways to help people finance their homes,” he said.

Arjan Verbeek, chief executive of Perenna, said: “We are supportive of the FPC’s focus on managing excessive leverage and their own assessment demonstrates the affordability measure alone can contribute to it.

“If we want to address today and tomorrow’s challenges with the right level of precision, we believe the LTI flow ratio needs significant amendment or even withdrawal. By doing so, the financial services sector can introduce much needed product innovation and competition.”

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