The FPC’s decision to recommend a cap of 15% of new loans for each individual lender (except those with total annual lending less than £100m – shortly to be increased to £150m, which represents only about 2% of total lending) was taken in 2014 when banks and the mortgage market in particular were still recovering from the Global Financial Crisis. It was designed to mitigate perceived macro prudential risks at that time but now more than 10 years later, with banks subject to other strict stress tests, this 15% rule is well past its sell-by date.
Following recent FCA guidance lenders have relaxed the stress test applied to borrowers, resulting in a higher maximum loan being available, based on affordability.
The obvious consequence of regulators relaxing the interest rate stress test is that a higher proportion of borrowers qualify for a loan in excess of 4.5x income. Lenders therefore now have an even bigger problem than before in deciding which of their potential credit worthy customers they should decline, or offer less to, to avoid breaching the 15% limit.
The Government claims it wants to help FTBs, but although the 15% rule in theory applies equally to FTBs and movers it is based on the number of loans, not the total value of loans. Therefore lenders have a commercial incentive, in pure financial terms, to use their 15% limit for larger loans, which are less likely to be for FTBs, in order to meet their lending targets.
Despite this some lenders will choose to prioritise FTBs for part of their 15% allowance but the FPC should question whether a policy which discriminates against FTBs is still appropriate.
