Brokers have dismissed the FSA’s fears that high loan-to-income mortgages will be unaffordable when interest rates rise, saying affordability calculators take interest rates into account.
In its Prudential Risk Outlook, published last week, the FSA warns lenders need to be sure mortgages advan- ced at more than 3.5 times a borrower’s income remain manageable when interest rates rise.
The regulator says the number of loans approved above 3.5 times a person’s salary was as high in 2010 before the peak of the crisis. It says record-low interest rates may have made high loan-to-income mortgages look more affordable to borrowers.
Chadney Bulgin mortgage partner Jonathan Clark says: “If you go back even 10 years, we did not have affordability calculators, only crude income multiples.
Affordability calculators have gone some way to fix the problem and if you have got a partner and two or three children, the calculator will reflect that.”
John Charcol senior technical manager Ray Boulger says: “Most affordability calculators used by the mainstream lenders are robust. I would trust most lenders to get the calculation right more than I would trust the FSA.”
The regulator also warns lenders they should have adequate provisions against the risks identified in the commercial real estate market.
The regulator says these include a lack of opportunity for borrowers to refinance, meaning loans have to be extended and could lead to lenders storing up prob- lems and borrowers failing to meet payment obligations and breaching loan-to-value covenants.
The FSA adds that a harsher economic environment could lead to price drops and more losses. It says: “Important credit risks have crystallised and still remain in specific credit categories and, above all, in commercial real estate, where the scale of eventual prob- lems may currently be disguised by extensive forbearance strategies.”