It took a while but April definitely saw the mainstream media finally cottoning on to the Mortgage Market Review (MMR) and the potential repercussions of it. Needless to say that it has not been overly positive in its review of the review and has focused almost entirely on the increased ‘difficulties’ that potential borrowers could have in a post-MMR world.
The move to affordability-based lending has appeared to be construed by some as a lender’s version of a ‘snooper’s charter’. In this world would-be borrowers are being told to expect an ‘invasive’ process or ‘the lender’s inquisition’ with details required on everything from travel expenses to childcare costs. It has perhaps passed some by that many lenders have been running these type of affordability checks for some time with the days of income multiples being the sole measure of whether a borrower could afford a mortgage long gone.
Of course the MMR adds in another layer of checks and balances, and of course interest rate ‘stress testing’ which will mean we will all need to keep an eye not just on the borrower’s affordability at the current rate but also a higher one. This will be something of a culture change for the industry but in these days of a record low Bank Base Rate I would be surprised if any adviser isn’t having the same conversation with clients about the chances of rates being higher in 2/3/5 years’ time and how they will afford any future SVR rate or a higher-rated new deal.
What perhaps we are seeing with the MMR is a much more formalised approach to these ‘common sense’ conversations that we would anticipate advisers as always having. Indeed, it would be something of a dereliction of duty for an adviser to merely think about affordability as it is now rather than what it might be come the end of the deal particularly if it is a short-term two-year (or less) offering.
I read recently an industry commentator bemoaning lenders for continuing to offer and promote two-year deals in an environment where it was almost certain that after that period rates would have risen. This seemed a rather odd comment to make as a client’s individual circumstances (and let’s not forget the property value) could change dramatically during that period. What if the client had plans to move after two years? What if they anticipated earning significantly more income in the next 24 months?
These are all issues which are unique to the individual borrower and mean that it is completely suitable for them to be choosing a two-year product. Add in the keenness of rates in this product band at the moment, particularly sub-60% LTV, and you can understand why a two-year deal would be appropriate. Indeed, with the new affordability rules they are going to be measured on their ability to afford a deal at a higher rate anyway so the chances of this kind of ‘payment shock’ after the deal has ended are going to be even lower.
The important part in all of this to me appears to be product choice. I am absolutely certain that it was never the FCA’s intention to stifle the market with MMR, neither was it the intention to curtail product choice. If anything, I suspect the regulator wants more lenders in the market offering more products and to produce an increasingly long-term sustainable marketplace.
It is interesting though that the FCA has recently talked about MMR taking the ‘froth’ out of the marketplace and it appears that – short-term at least – this will be one of the outcomes. While lenders have regained much of their appetite in the last 12 months, a period of stability (rather than a raging, aggressively competitive marketplace) might also suit them. Certainly they will be (and have been) pulling back lending levels slightly in order to ensure their systems and processes are in good health to deal with the new MMR rules.
All in all however I feel rather positive about the MMR world mainly because I truly believe that the intermediary sector will be the major beneficiary of the changes. The market may be froth-less over the course of the next few months however, given the increased targets of most lenders, it is hard to see the market not forging ahead in the second half of 2014 and beyond.
Richard Adams is managing director of Stonebridge Group