First published by The Intermediary
It’s all about timing
Timing in the mortgage market is everything – the shifting sands of the sector mean that, at any moment, product rates can change, values can go up or down, borrowers’ finances may alter.
All of which changes the dynamic of what is, or isn’t, achievable.
However, other areas of the market are not so timing-specific. They are long burns which the industry should ideally be given plenty of time to think about, with arguments and evidence put forth as to why they may be altered.
I’m thinking specifically of regulatory aspects of which, as we know, there are many and which you would hope come with plenty of good reasons for changing the current status quo.
The Bank of England’s decision to launch a consultation on whether to drop its 3% interest rate stress test for prospective mortgage borrowers certainly falls into the latter category.
First mooted at the end of last year, as an industry we now have a couple of months to give our feedback on whether this is the right decision, especially at this current time. As mentioned, timing is all important here.
Are stress tests overly restrictive to borrowers?
Introduced after the Credit Crunch, I can find few reasons not to think and believe this wasn’t an excellent piece of legislation, designed to ensure we did not have a repeat of the situation where thousands upon thousands of borrowers secured mortgage finance they were ill-equipped to afford at pay-rate, let alone a stress-tested one 3% above the reversion rate.
Now, some might argue that it is overly restrictive, that credit-worthy borrowers who can genuinely afford the mortgage are being ‘kicked out’ when pitted against the stress test.
Of course, there are going to be individual cases where this is likely to be right; however for its time, and indeed ever since, I think there has been an overwhelming benefit to having the stress test in place. Not least to ensure we did not return to those pre-Crunch lending excesses.
I suppose the question is whether it is required in the same way now. After all, there are arguments to suggest that it is actually the loan-to-income test which is more important to lenders (and borrowers), and that taking away the stress test doesn’t mean the lending floodgates are going to be opened.
Indeed, even if the stress test is removed, we may well have a situation where the affordability measures are so ingrained in current lenders’ calculations that they choose not to move away from them anyway.
A belt and braces approach to borrowing
I fully expect that to be the case for some lenders but not all, not least perhaps new players who may be looking to make their mark in an ultra-competitive market and might need to write business very quickly.
What worries me again is timing. As has been pointed out, in a stable interest rate environment where rate rises appeared to be some way away, the removal of this stress test might actually seem sensible and logical. Indeed, if this had been mooted a few years ago then few might have argued against it.
However that’s clearly not the environment we have now. Bank Base Rate looks likely to end the year in the 1.25% region; it is also likely to move up to 2% through 2023.
We know that mortgages agreed under the current rules have been stress-tested way beyond this level, so we can be fairly confident in the ability of borrowers to keep on affording their mortgages. That is the whole point of the rules after all.
It might feel like a belt and braces approach but, given our history of lending activity in the first part of this century, who is really going to argue against this.
If it ain’t broke, don’t fix it
Certainly not me and given everything else that can change and is impacting on our market on a daily basis, the level of stability this affords suggests to me that if it ain’t broke, don’t fix it.
Over the past decade or so, have these rules felt like an over-egging of the regulatory pudding? I don’t think so.
At a time therefore when it feels like we could do with all the security and solidity we can muster, then the removal of such a measure feels like a mis-timed step to be taking. Whether the industry and other stakeholders feel the same way however, remains to be seen.
Simon Jackson is chief executive officer at MSS