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.