The chief executive of Shawbrook Bank has criticised some lenders for reckless lending practices that are akin to “shutting your eyes and hoping for the best”.
Steve Pateman has hit out at slack affordability tests that do not sufficiently ensure borrowers can afford their loans once interest rates rise.
He told the Telegraph: “When you see people lending high loan-to-values and doing affordability tests on current payment rates, that is just crazy, it is like shutting your eyes and hoping for the best.
“The big challenge for the economy is that when things normalise, by which I mean normal interest rates and normal inflation, managing the debt burden that the UK currently has will require quite a lot of sensitivity and intelligence.”
Pateman said banks prepared to lend at 90 per cent LTV with fewer affordability checks were leaving themselves “exposed to interest rate risk in a pretty big way”.
He added: “That is why the Bank of England gets concerned, because they worry about loose lending. In that regard, they are right to worry.”
The Mortgage Market Review brought in tighter affordability rules for the owner-occupied sector, although there are currently no rules to govern buy-to-let lending practices.
However, the Bank of England’s Financial Policy Committee will soon be given powers of direction over the buy-to-let market, meaning it will likely be able to place caps on things like maximum loan-to-values and the rental coverage ratio if it deems it necessary.