This morning the Financial Policy Committee released their much anticipated report into the mortgage and property market and announced two main initiatives:-
• A new affordability test where mortgage lenders should asses if borrowers could still afford to repay their mortgage if interest rates were three percentage points higher than at the time of the loan.
• No more than 15% of a lender’s total number of residential mortgages should be at, or greater than, 4.5 times the borrowers’ income.
In essence, however, these new measures amount to much ado about nothing given the current market conditions.
Under the Mortgage Market Review, (MMR) lenders are already stress testing at a rate of around 7% so the new 3% above current rate level does nothing more than standardise this across the board without having a major effect.
The main question this gives rise to is what rate lenders will apply the 3% to? Is it the revert to rate, which will be interesting for lenders like Accord, or the initial product rate? As usual the Bank has been pretty clear in being unclear!
The restrictions on lenders allowing only 15% of their mortgage book to be above 4.5 times income multiples is more of a case of future proofing rather than having any substantial effect now, although those purchasing in London are likely to be effected more quickly.
Recent statistics from the Council of Mortgage lenders suggest that in Quarter 1 of this year only 9% of mortgages in the UK were advanced at income multiples above 4.5 times, whilst in London the figure was 19%.
The big question here is how are lenders going to determine which borrowers fall in to the 15% able to lend above 4.5 times income? We could well see some lenders taking the easy option of limiting all loans to this level even though they are comfortable under the current affordability regime.
A potential swing back to income multiples especially, does seem at odds with the recent MMR move away from this to an affordability based approach. After all, if the mortgage is deemed affordable not just now, but also on a stress tested basis at rates around the 7% mark, then it should not be an issue if this equates to more than 4.5 times income.
Perhaps more importantly, Governor Carney indicated that over the next 3 years the he “tolerate” no more than a further 20% rise in house prices. This could of course change if wages increase in line but it was a definite attempt to draw a line in the sand.
All of these actions, put together with talk of future rate rises getting ever closer on top of the MMR restrictions, seems to be more an act of changing buyer sentiment further rather than a call to arms and is probably a sensible shot across the bows for the future.
We are already seeing the froth come off the London market as buyers become more reluctant to pay higher prices and time should be taken to allow this change in sentiment to take hold.
There is also an element of confusion in this policy as it does seem that any changes made will be a case of giving with one hand, in terms of moves to assist house builders and first-time buyers with government programmes such as Help To Buy, and taking away with the other.
Furthermore, it does not deal with some of the deeper underlying issues of lack of good quality homes in high demand areas many of which are snapped up by cash buyers, foreign nationals and buy-to-let investors. Typically these types of buyers will not be affected by changes to the mortgage market.
It is the supply side issues that need to be addressed fundamentally, rather than tinkering with the demand side.
What is more confusing however, if housing is of central importance, is the question as to why the Housing Minister does not warrant a full Cabinet position?