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FPC: Stress test rules could push borrowers to longer fixes

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 as if base rate was at least 3 percentage points higher at any time over the first five years of the loan.

This new requirement is similar to the stress testing requirements in the Mortgage Market Review, except the FPC has now stipulated that lenders assume a minimum increase in base rate of at least 3 percentage points, compared to assuming a minimum of 1 percentage point increase and having regard to market expectations of a movement to base rate as part of the MMR.

Minutes from this month’s FPC meeting show members believe borrowers could be pushed to five-year fixed rates, or even longer, to avoid the stress testing rules.

The minutes says: “The committee noted that its recommendation might create an incentive for more borrowers to seek five-year or longer fixed rate mortgage because the MMR stress test only assessed affordability in relation to mortgage interest rates prevailing over the first five-years of a new contract, five-year or longer fixed rate mortgages were, in effect, excluded from it.

“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 bank rate were to increase.”

Alongside the stress testing recommendation, the FPC announced measures that mean only 15 per cent of a lender’s mortgages will be at more than 4.5 times a borrower’s income. This will only apply to those lending more than £100m.

The minutes show there was some disagreement over how the LTI cap should be designed. Some members argued for a very high LTI multiple but tightly limit the proportion allowed, while others called for a lower multiple and a looser limit on how many are allowed.

The committee decided on the latter approach because of concerns that risks to financial stability could still arise if large numbers of people took out loans just below a very high LTI threshold.

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Comments

There are 6 comments at the moment, we would love to hear your opinion too.

  1. Steven Pearman 1st July 2014 at 1:06 pm

    It really worries me just how little these people appreciate regarding making people mortgage prisoners. Every decision they make allows lenders to charge people more money for the same thing.

  2. Suitability Letter Paragraph:

    “This 5 year fixed rate mortgage most suits your needs because this was the only way that the lender would deem your income sufficient to meet your monthly repayments and if you really really want this property then it is either 5 year fixed or 5 year fixed even though you will probably want to move after 3 years. We discounted 2 and 3 year fixed rates because they are not affordable, however when the 5 year fixed rate expires, this mortgage will also not be affordable”.

  3. What worries me is the potential additional cost to borrowers of this move. A two year fix at 2.09% costs £428.25 per £100,000 a month, whereas a 3.29% five year fix costs £489.43, so £61.18 = £734.16 a year more. THIS is the way to “assist” affordability? It’s bad enough that these numbers relate to just £100,000 of mortgage, so with our ‘average’ client holding £285,000, the additional cost rises to £2,092.36. That’s £4,184.72 over two years that HAS to be found from within disposable income, so dare we consider that rates ‘may’ still be moderate in two years’ time and what this will have actually cost the borrower over the whole five years? Who’ll bear the brunt of complaints if this does become the case?

  4. GP Styles (GPS Economics) 1st July 2014 at 3:36 pm

    David Miles will be delighted…. at last we might get some of what he recommended in his 2004 Mortgage Report.

  5. Steven Pearman 1st July 2014 at 4:33 pm

    It really worries me just how little these people appreciate regarding making people mortgage prisoners. Every decision they make allows lenders to charge people more money for the same thing.

  6. Steven Pearman 1st July 2014 at 6:26 pm

    It really worries me just how little these people appreciate regarding making people mortgage prisoners. Every decision they make allows lenders to charge people more money for the same thing.

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