Current affordability measures 'not fit for purpose', mortgage lenders say

Following the Financial Policy Committee’s consultation on affordability criteria launched earlier this year, Perenna, a new bank applicant aspiring to offer long-term fixed-rate mortgages, and digital mortgage lender Habito, have put forward their views in a joint response.

Rozi Jones
12th May 2022
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"We are in the midst of a growing economic crisis, a significant challenge in the form of climate change, and continued dysfunction and inequity in the housing and mortgage markets."

Under the current measures, for fixed rates shorter than five years, mortgage applicants must undergo a ‘stress test’ to ensure that the borrower is able to pay their mortgage at 3% above their lender’s reversionary rate. Mortgage lenders that originate above £100m a year are also limited to providing 15% of their new lending at a 4.5 loan-to-income ratio or higher.

The firms’ joint response to the consultation notes that while they’re both supportive of measures that address excessive leverage in UK mortgages and underpin a responsible lending environment, the current measures are "not fit for purpose when viewed against customer needs".

Perenna and Habito’s view is that a review of the LTI flow ratio would provide opportunities for specialist lenders to develop products for underserved areas of the UK population such as first-time buyers and later life borrowers, who often require higher LTV and LTI products.

As such, Habito and Perenna have put forward two recommendations that would meet the FPC’s objectives, while also driving better outcomes for consumers:

● Implement the FPC’s proposed recommendation to remove the 3% stress test and also revise the LTI ratio exemption that applies to all lenders with annual originations of £100 million to apply to only those who originate at least 2.5% of annual gross mortgage lending, or;

● Remove the LTI ratio completely but retain the 3% affordability stress test for loans with a fixed-rate term of fewer than 5 years

The lenders say either action would "drive competitiveness in the mortgage market by allowing specialist lenders to compete with the high street lenders and enhance customer choice whilst, importantly, controlling excessive leverage in the UK economy".

Alan Fitzpatrick, VP of lending operations at Habito, said: “House prices have increased substantially, thanks to a historically low interest rate environment, but many would-be homeowners and movers haven’t been able to keep pace because the lending landscape hasn’t moved far enough forwards. Our research shows that more than half (53%) of UK homeowners have been limited by what they could borrow for a mortgage, even though 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.”

Arjan Verbeek, CEO of Perenna, commented: “We are in the midst of a growing economic crisis, a significant challenge in the form of climate change, and continued dysfunction and inequity in the housing and mortgage markets. 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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