Propertywire speaks to Ray Boulger, senior technical manager of John Charcol, on the mortgage rules the Financial Conduct Authority and the Bank of England could end up loosening or scrapping altogether, something that’s currently being explored by the regulators.
He reckoned there could be changes to lenders’ income multiple limits and capital requirements, which would encourage lending to those with small deposits.
Meanwhile mortgage stress tests could stop being pegged to standard variable rates which are rarely used, as that can restrict mortgage choice for borrowers.
Income multiple limit
Ray Boulger thinks the first rule on the chopping block is the requirement that no more than 15% of a lender’s mortgage book can be to borrowers with a loan-to-income ratio of 4.5 times.
He said: “That clearly is a constraint for a lot of lenders, and bearing in mind that the interest rate risk is lower for borrowers with a longer-term deal than short-term fix the logic of imposing a limit across the market is clearly non-existent.
“I would be surprised if that’s not one of the first rules to go.”
In 2022 the Bank of England scrapped a mortgage stress test at 3% above the revert-to-rate (standard variable rate), so it has history in loosening previously tight rules.
Capital requirements
The second rule Boulger expects to change is the amount of capital (cash reserves) lenders are required to hold when lending to people with a small deposit.
Like the income multiple limit, the rules make it harder for lenders to cater to first-time buyers.
Boulger said: “The amount of capital required for high LTV lending is disproportionately high compare to low LTV lending.
“If lenders don’t have to set aside such capital the cost of the lending goes down, so the mortgage becomes cheaper.”
If the rules were changed the cost of finance would likely narrow between those borrowing with a small and large deposit.
Mortgage stress tests
As it stands Financial Conduct Authority rules state that lenders have to stress test at the revert rate (standard variable) plus 1%, except for fixed rates over five years.
Boulger said: “That means stress testing is done at well over 8%, even though people in the main are going to be paying around 5.5%.
“20-30 years ago it was normal for deals to stay on a standard variable rate, but these days most people are going to do a product transfer or switch their mortgage.
“Using a standard variable rate on affordability is well out of date.”
As it stands mortgage lenders are incentivised to push borrowers onto a 5-year fixed rate, which is unhelpful for those wanting a short-term deal.
He went on to clarify that lenders would still need to be responsible, as a shorter-term lending is still riskier than long-term.
Bougler added: “Changing that rule would provide more competition in the market, as lenders could decide on their risk appetite.
“For a 2-year fix you need to build in a margin, but currently the margin is much higher than interest rates could realistically go.”
Rental income
Finally there’s talk of taking a tenant’s rental history into account when taking out a mortgage.
Currently such a product is available from Skipton Building Society, though it’s limited to 5-year fixed rates to avoid the afore mentioned stress test rules.
Boulger said: “If the rules could be clarified so more lenders can take rental income into account then that would be helpful.
“There’s no rule saying they can’t take rental payments into account, but a lot of lenders are reluctant to do that.”
It’s not uncommon for the average proportion of income spent on rent to be well in excess of a mortgage.
