Do HSBC's HTB Affordability Rules Protect it or Expose it to More Risk?

Posted on 21 November 2013 by Ray Boulger

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HSBC issued the following press release today:

From Monday 25th November HSBC will make two fixed rate mortgages, up to 95 per cent loan to value, available to customers as part of HM Treasury’s Help to Buy scheme.
All HSBC mortgage borrowers are assessed to ensure they could afford repayments at an interest rate significantly higher than the Bank of England base rate. For customers opting for a 90% to 95% LTV mortgage HSBC will ask them to acknowledge a monthly repayment illustration at a responsible long term rate. This will provide an indication of their increased monthly mortgage payment when, as expected, interest rates rise.
Details of the two fixed rate mortgages:

  • 4.79% 2-year fix – up to 95% LTV with a £99 booking fee
  • 4.99% 5-year fix – up to 95% LTV with a £99 booking fee

Brendan Cook, head of retail banking and wealth management for HSBC UK said:

“We want to support our customers, whether they are buying their first home or moving up the housing ladder. In order to protect them, we want to ensure they can afford their repayments when interest rates rise.”

In line with HSBC’s responsible lending approach and to safeguard customers at this 90-95% LTV level in the event of future house price fluctuations, the bank will require them to have a minimum deposit of £10,000.
All 90-95% LTV mortgages will only be sold in the bank’s branch network, and, in line with all HSBC mortgages, will not be offered through mortgage brokers. Initially the mortgages will only be available to customers looking to purchase a property, however we will look at offering these loans to remortgage customers at a later date.

This release highlights a couple of areas where HSBC is taking a very different approach to other lenders competing in this market. By specifying a minimum cash deposit what it is really saying is that it is not prepared to offer a 95% LTV mortgage on any property valued at under £100,000.

Therefore, despite some  politicians and others suggesting that the maximum loan under HTB should be reduced from the current £600,000 to restrict its availability in the strong London market, what HSBC is doing is the exact opposite and restricting its availability in the cheapest areas of the UK!

So when it says “We want to support our customers, whether they are buying their first home or moving up the housing ladder” presumably those customers living in parts of the UK where you can still buy a property for under £100,000 are less equal than others!  

The comments in the press release about affordability are even more interesting. It says: “All HSBC mortgage borrowers are assessed to ensure they could afford repayments at an interest rate significantly higher than the Bank of England base rate.”

As borrowers will have to make payments at 4.79% or 4.99% I would hope HSBC does assess affordability “at an interest rate significantly higher than the Bank of England base rate.”

But this is the really interesting and completely novel bit: “For customers opting for a 90% to 95% LTV mortgage HSBC will ask them to acknowledge a monthly repayment illustration at a responsible long term rate. This will provide an indication of their increased monthly mortgage payment when, as expected, interest rates rise.”

It will be very interesting to find out what HSBC considers is “a responsible long term rate.” Although it has chosen not to disclose this in the press release it won’t be able to keep its chosen rate secret once it starts issuing this document with its KFIs. (I am sure the FCA won’t allow it to include this info in the KFI.)

The FSA, as it was then, chose to specify that KFIs should use a 1% rate increase to show an example of the impact of rate rises, rather than any higher figure, at least partly to avoid the risk that if it used any other figure and subsequently mortgage rates increased by more than whatever figure it specified it could open the door to legal action. 

This could open a can of worms. Logically, if HSBC now starts “asking” its borrowers on a 95% LTV rate “to acknowledge a monthly repayment illustration at a responsible long term rate” it should do this for borrowers at other LTVs as well, even if it uses different rates at different LTVs.

After all, although the risk is greater if a high LTV mortgage goes wrong, mortgages have to be affordable regardless of the LTV!

Categories: Mortgages, Regulation, Interest rates

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