Stress test removal should be delayed as we figure out cost-of-living impactSo, the news is out. From the 1 August the Bank of England (BoE) and Financial Policy Committee (FPC) will no longer require lenders to keep the three per cent interest rate stress test in place when determining affordability for borrowers.
It’s a decision that I’m perhaps not surprised about, although I am certainly surprised at its timing, given the nature of our economy right now, as many are struggling to cope with what might be coming over the horizon.
Back in January – when the withdrawal of these requirements was first mooted, I wrote a piece which I’m now led to believe was at odds with the majority of those who responded to this consultation.
According to the Bank of England, of the 27 responses – including four from trade bodies representing mortgage providers and intermediaries – the majority were supportive of withdrawing the affordability stress test.
This could be a question of semantics though. It could mean that only 14 were supportive and none of them were the trade bodies mentioned, so we should perhaps be somewhat skeptical. However, read some of the reactions to the announcement and make your own views on the nature of this industry ‘support’.
Less of a case for stress test removalFor me, my view of the situation in January has solidified even further. Indeed, you might well argue that given everything that has happened in between then and now, the case for not removing the requirement has strengthened not weakened.
Back in January we were not in the middle of a cost-of-living crisis yet and we were not fully aware of what inflation might do or the heights it might reach. We also had not been presented with multiple increases in Bank Base Rate in order to try and curb inflation.
Timing is everything when it comes to these sorts of decisions. There also has to be an understanding of what the repercussions might be for those borrowers who might get through an affordability door, because of these changes, that would once have closed to them.
It was therefore interesting to read this from the Bank/FPC: “The consultation feedback did not provide any evidence to suggest that removing the affordability test would have a significant impact on the mortgage or housing markets.”
No offence to the authors but history is littered with examples, particularly in our sector, where the consequences of such actions were far removed from what was believed to be likely at the time. The regulators should certainly be wary of that and not believe those who say, ‘It won’t cause a problem’, especially if they are likely to be those who benefit the most from a policy change.
Measures already in placeNow, the argument of course is that there are other measures in place which can do the job just as well without the need for a stress test.
The Bank/FPC has clearly decided that the loan to income (LTI) ‘flow limit’ – which will not be withdrawn, and which limits the number of mortgages that can be extended to borrowers at LTI ratios at or greater than 4.5 – is going to be more useful in ensuring better underwriting standards.
However, it was deemed important enough to have the stress test for the past decade or so. As several commentators have pointed out, it does smack of extreme short-term memory loss, which is even more confusing given the stresses on many would-be borrowers’ finances.
Many might surmise that the belt and braces approach we are jettisoning actually provided a core strength for the market and its players. It set in stone what was allowed, and the success of that approach I think is self-evident during this period.
Again, you might rightfully argue, that this is the very time for retaining such interventions.
What comes next?Of course, the big question here I suppose is just what lenders will do having been provided with the ability not to stress test in this manner.
Will they continue to operate as they have done? Or will they feel that they can further meet the demand that this will help generate, and the previous rules were simply holding them back?
Lenders, it’s over to you.