The Financial Policy Committee believes new stress-testing requirements will push more borrowers towards longer-term fixed rates.
Last week, the FPC – the Bank of England committee tasked with safeguarding financial stability – recommended lenders stress-test borrowers’ affordability for a 3 per cent increase in base rate over the first five years of the loan. This new requirement goes further than stress-testing in the MMR, which require lenders to assume at least a 1 per cent increase in interest rates and take account of market expectations of a movement in rates.
Minutes from this month’s FPC meeting say: “The committee noted that its recommendation might create an incentive for more borrowers to seek five-year or longer fixed-rate mortgages because the MMR stress-test only assessed affordability in relation to mortgage interest rates prevailing over the first five years of a new contract.
“Some members thought this could be a positive development for financial stability as households would not face increases in their payment terms over that period, even if the Bank rate were to increase.”