Habito and Perenna have issued a joint statement to put forward two recommendations in response to the Bank of England’s Financial Policy Committee (FPC) consultation to withdraw the affordability test.
The consultation, which was issued in February, proposed to remove the affordability test when assessing mortgage applications.
While Habito and Perenna said they support measures that address excessive leverage in UK mortgages and underpin a responsible lending environment that enhances borrower resilience, they highlighted that the current measures are not fit for purpose when viewed against customer needs.
Under the current measures, for fixed rates shorter than five years, mortgage applicants must undergo a stress test to ensure that the borrower is able to pay their mortgage at 3% above their lender’s reversionary rate.
Mortgage lenders that originate above £100m a year, are also limited to providing 15% of their new lending at a 4.5 loan-to-income (LTI) ratio or higher.
Perenna and Habito suggested that a review of the LTI flow ratio would provide opportunities for specialist lenders to develop products for underserved areas of the UK population such as first-time buyers and later life borrowers, who often require higher loan-to-value (LTV) and LTI products.
The first recommendation put forward would see the implementation of the FPC’s proposed recommendation to remove the 3% stress test as well as revising the LTI ratio exemption that applies to all lenders with annual originations of £100 million, to apply to only those who originate at least 2.5% of annual gross mortgage lending.
It also recommended removing the LTI ratio but retaining the 3% affordability stress test for loans with a fixed-rate term of fewer than five years.
The joint statement said: “Either action would drive competitiveness in the mortgage market by allowing specialist lenders to compete with the high street lenders and enhance customer choice whilst, importantly, controlling excessive leverage in the UK economy.”
Habito vice president of lending operations Alan Fitzpatrick says: “Our affordability recommendations come at a time when interest rates are rising, the cost of living is top of mind and we simply need better and more sophisticated ways to help people finance their homes.”
Perenna chief executive Arjan Verbeek adds: “We are supportive of the FPC’s focus on managing excessive leverage and their own assessment demonstrates the affordability measure alone can contribute to it. If we want to address today and tomorrow’s challenges with the right level of precision, we believe the LTI flow ratio needs significant amendment or even withdrawal. By doing so, the financial services sector can introduce much needed product innovation and competition.”
The proposal to remove the affordability test when assessing mortgage applications was first floated in mid-December last year when the Bank of England’s FPC stated that it had reviewed two recommendations introduced in 2014.
In its review, the FPC concluded that the affordability test was no longer required because, “the LTI flow limit, without the affordability test recommendation, but alongside the wider assessment of affordability required by the FCA’s Mortgage Conduct of Business (MCOB) framework, ought to deliver an appropriate level of resilience to the UK financial system, but in a simpler, more predictable and more proportionate way.”
The consultation, which closed on 6 May, asked for views on removing the affordability test recommendation while retaining the LTI flow limit.
