FCA Reflect on Mortgage Affordability Rules

written by Rob Westbury | 4th April 2018

It is often feared by businesses and customers that new regulations are great in concept, but don’t always work in reality – either they miss their intended mark, or they come with unintended consequences that end up causing harm, rather than preventing it.

Given their elevated status, it would be easy for the regulatory bodies such as the FCA to sit above the industry and fail to take on feedback or adjust their own view for fear of looking like they made a bad call or hadn’t fully considered the consequences. Happily, however the FCA is showing that they are keen to be bold with new regulations and use data as a key driver in their policy making, but humble enough to be introspective and adjust their rulebook if the reality delivers something different to the expectation.

Their recent publication showcases this self-review approach: https://www.fca.org.uk/publications/consultation-papers/cp19-14-mortgage-customers-proposed-changes-responsible-lending-rules-and-guidance

By way of background, most people would look back at the financial crisis of 2008 and 2009 and reflect that there were some very questionable practices going on – mortgage lending being one of the key areas that impacted in the UK and the USA particularly.

In what was (almost universally) considered to be a good move the FCA implemented a raft of new regulations around enforceability to try and remove the risks the caused such dire impacts to FNMA (https://en.wikipedia.org/wiki/Fannie_Mae) and Freddie Mac (https://en.wikipedia.org/wiki/Freddie_Mac) . In short, borrowers were suddenly subjected to a much more strenuous affordability assessment before a mortgage would be granted, or a re-mortgage approved.

All good in theory, but in their latest consultation paper the FCA have identified that “There are two areas of harm that we are seeking to remedy with our proposals. First, the harm arising where our affordability rules contribute to preventing consumers switching to a more affordable mortgage.” And “Second, the harm arising from the costs of applying our current affordability rules to consumers who want to switch to a more affordable mortgage without borrowing more.”

Simply put, there is an unintended population of customers who – due to the rules bought in after the crisis – are now unable to re-mortgage and consequently are paying the SVR (standard variable rate) of their mortgage provider which is almost always significantly higher than the best available deals.

A quick scan on money supermarket shows the variance can be as much as 350% higher – Initial rates of 1.38% to 1.49% are common versus the SVR of 3.9% to 4.9%. One impact of the FCA regulations mean that those customers could be overpaying significantly compared to the best possible deals. In one example (A £230,000 mortgage over 33 years the difference in payments is £392 per month).

Having identified that there may be as many as 170,000 mortgage customers who are caught in the payment trap the FCA are proposing to change their rules to allow a simpler – more human – approach to those customers who:

  • have a current mortgage
  • are up-to-date with their mortgage payments
  • does not want to borrow more, other than to finance any relevant product fee or arrangement fee for that mortgage
  • are looking to switch to a new mortgage deal on their current property

These should allow many of those trapped customers gain access to better deals – saving them significant money in the future. It will allow mortgage lenders to make much simpler assessments of customers – both existing and new – where (simplifying things a bit) if the new mortgage is cheaper in monthly payments and total repayable and the borrower is up to date with their existing mortgage. The logic being if they have managed to afford their existing deal for a prolonged period, they should have no issues paying a cheaper deal.

Overall it is a great showcase of rapidly implementing new rules and regulations to prevent mainstream harm but making sure you always look back at the consequences of your decisions to make sure no-one is being left out.