When a borrower has been successfully making payments for years, surely this is sufficient proof of the ability to repay.
John Wriglesworth is managing partner of Instinctif
Post the Mortgage Market Review (MMR) the Financial Conduct Authority (FCA) created the transitional rules, allowing lenders to offer existing borrowers a new mortgage without forcing them through the new stricter affordability criteria. The proviso was that these borrowers could not increase the size of their mortgage.
However the new Mortgage Credit Directive (MCD) has cut this lifeline off, only allowing lenders to move their own customers under the transitional arrangements. In my view this is wrong.
The aim of affordability tests is to ensure borrowers can afford their mortgages. For a first time borrower, affordability tests must obviously be sensible. However, when a borrower has been successfully making payments for years, surely this is sufficient proof of the ability to repay?
I have never understood why lenders do not place more positive weight on an unblemished repayment record.
The FCA will undoubtedly say a past ability to pay is not sufficient to prove a borrower can afford the new mortgage if interest rates rise. Proper affordability tests showing a borrower can still afford a mortgage if interest rates rise are important. The MMR makes sure this test is applied.
I believe this view is misplaced for two reasons. First we are only talking about switching to a mortgage of the same or lesser size. Second, the borrower would only be seeking to switch if the new deal is better in affordability terms. Any concerns about future interest rises can be put to rest by offering them a 5-year fixed rate mortgage – an insurance policy against interest rate rises.
But let’s assume an existing borrower, that would fail the MMR affordability test, is allowed to switch and then gets in trouble with the new mortgage because of interest rises. This situation is unfortunate, but if the borrower was denied the switch he would still be in trouble with his existing mortgage and probably would have got in trouble more quickly as the old terms would almost definitely have been worse than the new terms (why else switch?). So if the FCA wants to deny the switch to protect the borrower, its rationale is flawed.
But maybe the FCA wants to deny the switch to help protect lenders? The argument is again flawed. Allowing an existing borrower to switch to a better deal does not increase the overall risk to the mortgage lending industry, it just switches the risk from one lender to another, and if the new mortgage is cheaper, it will be a lower overall risk with the new lender. Surely most lenders would agree that taking on a borrower, who has a proven ability to pay and where the new monthly payments and terms are better than previously, is a safe risk and should not need to go through all the affordability hoops??
