16 June 2014

Stress test rate rise could exclude 75% of local house buyers


A leading Northern Ireland mortgage broker has claimed 75% of local house-hunters will be excluded from the market if the ‘stress’ test level – which tests buyers’ ability to pay in the event of an interest rate rise – is raised to 10% in line with a suggestion by Bank of England Governor, Mark Carney.

Siobhan McAleer, founder of The Mortgage Shop which has 16 branches provincewide, was responding to recent comments by Mr Carney who said stress testing levels may have to go up to an interest rate of 10% in a bid to cool down the UK housing market in property hotspots such as Central London and the South East of England.  However, the Mortgage Shop founder has warned this could have serious implications for the Northern Ireland housing market.

House values in the most affluent parts of the UK have resulted in an eight per cent property price rise in the UK – 17% in London alone – while Northern Ireland and other regions have had minimal rises such as 0.3% in the province and 0.8% in Scotland, according to the latest figures from the Office of National Statistics.
“All house hunters who apply for a mortgage now undergo a ‘stress’ test which examines their ability to meet their mortgage repayments should the interest rate go up. However, Bank of England proposals to contain the London property bubble could result in local buyers with lower income levels not passing the new stress test,” Siobhan McAleer said today.

“The stress test factors in affordability in the event of an interest rate rise so If a borrower is having their application assessed at an interest rate of four per cent, for example – the in-built stress test will also evaluate if they can still afford the mortgage repayments should the interest rise above this level.”

However, Siobhan fears that an increase in the stress level test to 10% by the Bank of England in a bid to cool down rising English property prices would be a huge blow to the Northern Ireland housing market.

“Bank of England Governor Mark Carney has suggested that he may look at raising the stress test to 10% to restrict the amount of borrowing undertaken. While it is fine to increase the stress test level in London, it will remove up to 75% of people out of the market in Northern Ireland.”

Siobhan said that lenders should be able to exercise some of their professional judgment, adding: “The stress test level is a guideline so we should have a degree of discretion and be able to vary the rate at which borrowers are tested for their ability to pay their mortgage. While lenders have no control over interest rates levels, it may be possible for us to use our discretion on setting a stress testing level which reflects average incomes in Northern Ireland which are not comparable to those living and working in Central London which is inhabited by some of the wealthiest people in the world.”

The Mortgage Shop founder added the recent Mortgage Market Review measures, which came into force on April 26 and require that all lenders must examine borrowers’ income and spending in greater detail, should help control London’s overheating market.

“The regulations which are a consequence of the Mortgage Market Review have already put safeguards in place to slow down borrowing, and this should be an effective method for the rest of the UK.”

Recent comments by Bank of England Governor Mark Carney strongly hinted at a possible early interest rate rise by next January. The CBI has also speculated that a 0.75% interest rate rise is set to happen in the first three months of 2015 in a bid to slow down UK house prices.

Mr Carney says rising house prices are the biggest threat to long term economic recovery and financial stability in the UK.

A Bank of England spokeswoman said she could not comment on Governor Mark Carney’s comments, but referred instead to the Financial Conduct Authority’s Consultation Paper which was part of the recent Mortgage Market Review.

The FCA document said that while lenders must impose a responsible and realistic stress test level, they can factor this in at a rate which reflects their customer base and products.

The FCA guidelines said that while the majority of lenders have agreed applying an interest rate ‘stress test’ to mortgage applications is important in terms of assessing affordability, most were not in favour of the financial body publishing a set rate as this would not be appropriate for all borrowers, considering the number of mortgage products in the market.

The FCA agreed it would not be appropriate for it to set a single stress test rate for all lenders, adding: “We propose instead to require lenders to undertake stress-testing of interest rates with reference to market expectations for interest rates over the next five years. Lenders cannot make their own forecasts about this – they must be able to justify the stress test applied by reference to an independent published source of market expectations, such as the forward sterling rate published on the Bank of England’s website.

“Where interest rates are expected to fall, or to rise by less than one per cent, lenders must assume a minimum rate increase of one per cent over the five-year period.

“Our intention is for lenders to use the expected interest rate curve as a clear interest rate scenario within which to frame their approach – rather than derive a universal stress rate. This approach is designed to give lenders flexibility to set the rate used in a way that reflects their customer base and products, allowing them to retain control and plan ahead while testing the impact of interest rate rises on affordability for each mortgage application.”

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