Borrowers are being tested on whether they could meet mortgage payments if rates rise, despite consensus expectations the base rate will fall, lenders have warned.
The situation, which was uncovered as part of a special FT Adviser investigation, means potential homeowners could be limited in how much they could borrow.
This is based on an assumption they would be unable to afford to repay ever-higher mortgage rates, when in fact many lenders are already reducing their rates in anticipation of a Bank of England rate cut.
“What we've got is a disconnect in terms of swap rates being expected to reduce; we’re expecting bank rate to fall over the medium term,” said Ben Merritt, director of mortgages at Yorkshire Building Society.
“But because the bank rate is still high at the moment, and the reversionary rate is set on that bank rate, we're having to stress at a level that we don't think customers are actually going to incur.”
Unless a rate is fixed for at least five years, lenders are required by FCA rules to assume that rates will rise by at least 1 per cent during the first five years, even if they believe that rates are likely to fall, or rise by less than 1 per cent.
Although rates are expected to become less of a restriction on how much homeowners can borrow, Merritt said the LTI flow limit will start to become a binding constraint again.
General election
This comes as political parties have put forward plans to woo voters by making pledges to help more Britons onto the housing ladder.
Conservatives and Labour have made pledges on house building and mortgage guarantee schemes. The Conservatives have also pledged to scrap stamp duty for first-time buyers on homes up to £425,000 and introduce a new Help to Buy scheme.
But an April report for the Building Societies Association recommended, among other things, a review of the LTI flow limit to assess whether it would be beneficial to adjust the limit and to target mortgages above the cap at first-time buyers.
The Intermediary Mortgage Lenders Association has also urged government to review regulatory barriers to first-time ownership.
“Imla believes that government can help future first-time buyers by examining the regulatory barriers to ownership,” said Kate Davies, executive director of Imla.
“Particular attention should be paid to the Financial Policy Committee’s LTI flow limit, under which lenders are restricted to offering no more than 15 per cent of their mortgages at or above 4.5 times income, as this seems at odds with the rest of the affordability regime.”
FT Adviser investigation
FT Adviser's senior features writer Chloe Cheung has carried out an investigation looking at the future of the UK housing market, exploring the issues that lenders face with the LTI flow limit and how it might be adjusted to support first-time buyers.
