Mortgage stress rate is just one of three hurdles

Mortgage stress is just one of the top three barriers to homeownership for consumers, according to Vicki Harris, business manager at Kensington Mortgages.

She said: “Mortgage stress rating is an important consideration for lenders when assessing a client’s affordability. However, this is only one of three main variables for customers to consider.

“Those looking to secure a mortgage will need to consider the mortgage affordability test, loan-to-income ratio (LTI) cap and a deposit.”

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The LTI stream limit limits the number of mortgages that can be extended at loan-to-income ratios equal to or greater than 4.5% to 15% of a lender’s new mortgages.

In 2014, the Financial Policy Committee (FPC) began subjecting borrowers to two tests when taking out mortgages.

These were intended to guard against a relaxation of mortgage underwriting standards, which, in turn, could lead to a significant increase in overall household debt.

However, the Bank of England recently announced the possibility of withdrawing its mortgage affordability test.

This is currently in place to ensure borrowers can keep pace with mortgage repayments in the face of rising interest rates.

It is believed that less stringent mortgage rules will bolster the ability of thousands of buyers who are considering buying property but are struggling financially.

Harris said: “It’s a very interesting time for the Bank of England to consider scrapping the mortgage affordability test.”

As a result of the pandemic, the market has undergone many changes and it has become more difficult for borrowers and lenders as the economy has struggled due to COVID.

She added: “I think there is a question as to whether the Bank of England really wants to introduce these changes to this market.

“Not in principle, but if it’s beneficial to the market and the economy as a whole.”

In a bid to gauge the effect of the removal of the affordability test on lenders and the housing market, the Bank of England has launched a consultation on the issue while maintaining the LTI recommendation.

The consultation will end on May 06, 2022.

The Bank of England had previously stressed that responsible lending rules under the Financial Conduct Authority’s Mortgage Business Conduct (MCOB) would continue to apply as an appropriate affordability check.

Harris explained that while this change would have an impact, she wasn’t sure it would have the impact the Bank of England predicted.

That’s because she believes that removing the affordability test from a mortgage just eliminates one of the top three barriers to homeownership.

She said: “I think it’s a very strange time to introduce these changes and you also need to consider whether lenders want these changes and whether they will go ahead and implement them themselves.”

Harris thinks some lenders will follow the Bank of England’s recommendations, but an equal amount will choose not to.

She said: “Lenders are very cautious largely because of the financial crash of 2007/2008 so I’m not sure the Bank of England will see it becoming significantly easier for people to buy a property through its changes.”

The pandemic hasn’t had quite the same impact on the market and the economy as the financial crash of 2007/2008. Many in the industry believe it’s because people learned from mistakes they’ve made before, which prevented a similar outcome this time around.

The crash of 2007/2008 was caused by predatory lending that targeted low-income home buyers, as well as excessive risk-taking by global financial institutions and the bursting of the housing bubble in the United States. Mortgage-backed securities (MBS) linked to US real estate, as well as a wide range of derivatives linked to these MBS, have collapsed.

However, while the market is in better shape than it was during the previous stock market crash, Harris explained that it is still volatile and for the most part difficult to predict the future.

She said: “The current market is volatile and unpredictable, so I think this change will raise more questions than it answers.”

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