The Financial Policy Committee (FPC) of the Bank of England has issued a consultation paper which includes a suggestion to withdraw the mortgage affordability test for new mortgage applications.
What is the Mortgage Affordability Test?
Following the Credit Crunch Crisis of the late ‘noughties’ and subsequent bank collapses due to 'toxic' mortgage debt, the Financial Conduct Authority (FCA) conducted a full Mortgage Market Review (MMR). Working alongside the Bank of England that regulates Banks via the Prudential Regulation Authority (PRA) the FPC (also Bank of England) then issued a directive in 2014 that a mortgage affordability ‘stress’ test was required.
The Stress Test: Lenders and brokers must check and financial assess that a borrower can not only afford to meet the mortgage payments today but also be able to pay afford their mortgage under financial stress i.e., if interest rates went up e.g. at the end of your discounted or fixed rate moving to the lender’s standard variable rate (SVR) plus an additional increase of 3% pa.
This stopped mortgage lenders over lending, with some lending 9 X Loan to Income (LTI) at the time and clearly unaffordable to a more stable level that we see today of an average of 4.5 X LTI.
Standards Have Improved
The FPC suggests that lending standards have dramatically improved since 2014 and even with the recent boom in property prices and therefore the size of loans required, standards have not fallen. This is the basis for them considering removing the stress test.
This is a disaster in the making. We predict a property market just like the 1980s. Inflation is the driver. Prices will rise, wages will rise, property prices will rise and lenders will become inventive in finding ways for borrowers to borrow more money. We then had a property collapse in the early 1990s and again during the credit crunch.
In our opinion, this is another ‘crass’ move by the Bank of England to stimulate and promote inflation which whilst it pushes wages and property prices up, by default it will devalue public sector debt (much of it covid debt). Governments around the world cannot afford to repay their covid-19 borrowing debts and need inflation to devalue public sector debt before they need to repay it in say 10, 20 and 30 years.