Former FCA mortgage head – core safety checks are still in place

Despite the fears around scrapping the Bank of England’s mortgage stress tests, the core safety measures imposed by the Financial Conduct Authority remain.

That’s the message from Lynda Blackwell, formerly head of mortgages at the Financial Conduct Authority.

She said: “I’m pleased to say this change was not a core component of the FCA’s Mortgage Market Review.

“The full MMR affordability checks remain in place, which is actually one of the reasons the Bank of England felt it could do this.”

When introducing its Mortgage Market Review regulation in 2014 the Financial Conduct Authority asked lenders to apply a stress test of at least 1% above the lender’s revert to rate.

Then the Bank’s Financial Policy Committee stepped in with its own stress test.

When assessing mortgages lenders were told to stress test against their revert-to-rate (typically their standard variable rate) plus 3% over the first five years of the loan, meaning the rate at which mortgages were stress tested against has been around 7%.

However such a test is increasingly seen as overzealous, and since 2018 it hasn’t actually applied to around half of mortgages.

This is because mortgages fixed for more than five years are excluded from such stress tests.

As emphasised by Blackwell, the FPC will also still have added safety in place due to its ‘loan-to-income flow limit’.

This limits the number of mortgages extended at LTI ratios of 4.5 of higher to 15% of a lender’s new mortgage lending.

Ray Boulger, senior technical manager of John Charcol, made a compelling argument for the scrapping of the Bank of England’s stress tests earlier this month.

He wrote: “The FCA is trying to ensure consumers will still be able to afford their mortgage after factoring in a realistic assessment of interest rate increases. The FPC of course also wants this but it has a much wider remit – stability of the banking system and the impact any mortgage stress will have on the broader economy.

“Increasing the stress test obviously reduces the risk of repossession and potential lender losses but if the test is too strict some consumers are unfairly excluded from the market, or from trading up, and economic activity is unnecessarily negatively impacted.

“As government policy is to encourage home ownership, any mortgage test which is unduly stringent risks undermining this policy and, in some cases, preventing a credit worthy first time buyer from obtaining a mortgage, even if monthly payments are less than their rent.”

He added: “A stress test is clearly needed for mortgages where the rate is not fixed for the whole term, but the appropriate level needs to be actively considered on an ongoing basis in the light of changing financial conditions – not left unchanged for 8 years, as the FPC has done, despite significant changes in market conditions during that period, as it admits in the Consultation Document.

“On the same basis that the FPC’s countercyclical capital buffer for banks is designed to reflect economic changes, mortgage stress tests should reflect the interest rate cycle and expected changes, whilst recognising the fragility of forecasts.”

Boulger is also critical of the FCA’s ‘loan-to-income flow limit’, which he views as a blunt tool preventing a number of safe borrowers from accessing the mortgage market.

His full writeup can be read here.


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