Back in the summer, when the BoE confirmed that it would withdraw its affordability test from August 2022, we wrote a blog questioning the timing. To recap, the requirement was introduced in 2014 with the intention of preventing loosening of credit assessments and to ensure that reckless lending would not cause an economic downturn putting financial stability at risk. At the time regulators also introduced a loan to income limit (‘LTI’), to cap the number of mortgages that could be approved at ratios greater than 4.5 times salary, arguing that would be a more effective brake on irresponsible ‘credit creep’.
Now the Central Bank of Ireland has joined the party announcing that from January, first-time buyers will be able to borrow up to 4 times their gross income, up from 3.5 times currently.
Critics of these moves highlight the fact that borrowers are already facing affordability issues at this point in the economic cycle and question the timing of the relaxations. Combined with the general cost of living increases and the increase in mortgage borrowing costs, it is inevitable that the industry is facing increasing arrears, collection challenges and increased repossessions.
Responsible lending regulation sits firmly with the regulator via the FCA’s MCOB guidance, but commentators are becoming concerned about the potential threat to market stability if lenders accept greater levels of affordability risk. We have already seen lenders competing to hit more aggressive lending targets, risking reductions in stress test criteria which could easily result in poor customer outcomes. For example, a large regional building society recently reduced its stress test percentage from 3% to 2%. While the case put forward for the change focuses on the lender’s manual, case by case underwriting procedures, such a move still ratchets up affordability risk.
This is a trend that will impact on both purchasers and funders of mortgage portfolios. Both groups of investors need to take a more inquisitive approach to fully understand the risks in the portfolios they invest in or fund. Rockstead can help with this analysis and build the appropriate processes to ensure funders are not exposed to greater risks as a result of this change. To learn how we can help please give us a call.