REVIEW
LONDON
A step in the right direction Robin Johnson MD, Kinleigh Folkard & Hayward
A
lmost exactly a decade after the Financial Services Authority published its final Mortgage Market Review rules in October 2012, the Bank of England (BoE) has scrapped one of its toughest measures. On 1 August, the Financial Policy Committee ditched the requirement that lenders stress-test borrower affordability to ensure borrowers could make monthly repayments even if they defaulted onto their lender’s standard variable rate plus another three per cent, just in case interest rates rose. Had that measure been in place before the credit crunch, we might not have had the global financial crisis. The BoE rate was climbing in the mid-2000s and got as high as 5.75 per cent in 2007. Northern Rock would definitely not have been handing out 125 per cent loan-tovalue mortgages had the stress test been required. Imposing that test on lenders and borrowers from 2014 on, when the rules finally came into force, was rather a case of bolted horse and locked stable door. The BoE rate plummeted to 0.5 per cent, where it remained for the best part of a decade, while screwing the affordability lid onto the market left fewer borrowers able to buy or move so freely, which resulted in less housing stock – and, hey presto, rapidly rising house prices. It’s a spiral that feeds itself. So the FPC’s move to get rid of the stress test makes a lot of practical sense if you want to encourage economic growth and individual prosperity. Housing transactions
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MORTGAGE INTRODUCER AUGUST 2022
drive productive spending on construction and among ancillary industry workers like plumbers, electricians, and decorators. Retail spending on home furnishings and DIY rises, too. The sceptical among readers might say this is history repeating itself. The BoE has only just begun to raise its rate consistently; surely this is yet another horse-and-stable-door situation – particularly if you factor in rampant inflation, which will just be exacerbated by additional spending? I disagree with this view. I think the FPC’s decision to press on with removing the affordability stress test is more nuanced. First, it only ever applied to fixedor variable-rate deals lasting less than five years. With the base rate heading steadily upward, borrowers are leaning toward terms of five years or longer – meaning there is absolutely no change in the way affordability is assessed for the majority of borrowers. Second, uncontrolled spending that leads to serious inflation such as we have now is rarely in the gift of central banks. They’ve said repeatedly that consumer price inflation will ease toward the end of next year. The reason everything is so much more expensive now is Russia’s war on Ukraine and postpandemic supply-chain chaos. That is forcing everyone to spend uncontrollably on something totally unproductive for the UK economy. Third, spending on infrastructure, manufacturing, and improving British citizens’ quality of living while money is – interest rate rises notwithstanding – historically unbelievably cheap creates real and healthy economic growth domestically. We need to focus on improving productivity, and making housing more affordable for those who are opting for two-year finance to keep payments lower will do that. Concern about the rising cost
of living for borrowers has been levied as a criticism, but again, I think the BoE has that covered, too. The banking crash and consequent taxpayer-funded bailouts have built up a considerable amount of credit where customers are concerned. Forbearance has characterised the past decade, arrears have been carefully managed, and flexible payment plans necessitated by the pandemic remain in place for borrowers facing financial struggle. Interestingly, the BoE said in its latest Financial Stability Report that while it considers banks to be very well capitalised, it was nevertheless telling them to double their capital buffers to prepare for the “uncertainty” of future economic health. This sounds like not-sosubtle code for “Banks need to have enough capital to support customers through this painful period, which cannot and will not last forever.” I am particularly sanguine about the effect that removing the stress test will have on the capital, where property prices are still very high in relation to salaries. Allowing borrowers, many of whom are extremely affluent by any reasonable standard, to make use of lower short-term fixed rates to get on that first step is a very smart move. Many of these borrowers are paying high rents, and the sooner they start paying a mortgage instead, the better for their financial prospects. The advantage of shorter-term deals is also that most borrowers will see their wages go up over the next two years – wage growth is strong, as is employment, even with inflation where it is. If one is remortgaging in two years’ time, even if rates are higher than they are currently, the affordability balance will be different, and quite likely better for this type of customer. On balance, dispensing with the stress test is a good move – for borrowers and for the broader economy. M I www.mortgageintroducer.com
