You might remember that back in March 2020, the Bank of England released mortgage market recommendations to limit the proportion of loans that could be offered on high loan-to-value rates, arguably making it harder for some UK borrowers to access higher loans.
The measures which were implemented on the advice of the FCP, a group of thirteen members whose job it is to remove or reduce the risk of financial instability in the UK, will be reviewed with new recommendations set to be published in 2021.
This guide provides a breakdown of what we know so far and looks at the likelihood of lenders loosening their reins so that more people can buy a house in 2021.
Who are the FPC?
The Bank of England's Financial Policy Committee (FPC) has the power to direct regulators and government to take action on a number of matters regarding financial stability,
The group, which includes six members of the BoE’s team including Governor Andrew Bailey, recommended a number of actionable points in March, 2020, in a bid to ensure the UK financial system was resilient to the wide range of risks it could face during and after the Coronavirus pandemic.
What do the FCP do?
Set loan-to-value and debt-to-income limits for UK mortgages
Set loan-to-value and interest cover ratio limits for UK mortgages on buy-to-let properties.
Set the countercyclical capital buffer (CCyB) rate for the UK
Set sectoral capital requirements for UK firms
Set a leverage ratio requirement for UK firms
Essentially, the group takes great interest in the financial wellbeing of the UK and has, what some might say, great influence on the financial system.
Do UK banks have enough capital to support mortgage lending?
Having built up the resilience of the UK financial system since 2013, the thirteen members of the FPC judged that major UK banks were well able to withstand severe market and economic disruption. Their findings were that:
Major UK banks have Tier 1 capital levels of around 17.5% of risk‑weighted assets — more than three times higher than before the global financial crisis.
They hold £1 trillion of high‑quality liquid assets, enabling them to meet their maturing obligations for many months.
The FPC further judges that household vulnerability is considerably lower than before the financial crisis.
What were the recommendations set by the FCP?
This information allowed the FCP to come to the decision that the UK banks had enough capital to temporarily absorb some financial loss. Therefore, one of the recommendations was the reduction of the UK countercyclical capital buffer (CCyB), which was reduced from 1% to 0% in March 2020.
The reduction of the rate creates an additional cushion for banks to absorb potential losses and continue lending. The lower the rate, the more financial loss absorbed by lenders.
The FPC recommended that for at least 12 months, the rate remained at 0% and that banks would continue to absorb potential losses while consumers could access credit with as few obstacles as possible.
Further advisory points included that any subsequent increase would not be expected to take effect until March 2022 at the earliest.
Did the FCP’s recommendations make it harder to get a mortgage?
In a financial committee policy meeting back in March 2020, the FPC noted that given the prevailing uncertainty around the outlook, it would be very challenging for financial institutions, firms, banks and auditors to make judgements about the outlook for the economy at this time.
Essentially, even though the FCP’s recommendations had tried to provide certainty to lenders, they couldn’t control the unpredictable nature of events or lender’s decisions to restrict LTV rates.
Speaking on the matter, the BoE added: “Since their implementation there is no evidence that the FPC’s measures have had a material impact on mortgage availability in aggregate.
These measures operate alongside other constraints — dictated by lenders’ own internal risk appetites — that together influence how much a prospective mortgagor is able to borrow.”
Despite efforts to alleviate pressure and ensure financial stability, many UK lenders did reduce their lending capacity and tighten criteria, making it difficult for some buyers to break
the renting cycle.
Mortgage lending was restricted
Shortly after the news of Coronavirus and the BoE’s decision to reduce the base rate to 0.1%, many lenders and building societies tightened their lending criteria. Some banks even tripled their deposit requirements, dashing the dreams of many first-time buyers who felt the hurdle of homeownership was yet even more unreachable.
The BoE has stated that this was likely to be the result of the general economic outlook, coupled with operational constraints at lenders, rather than a direct result of its policies.
Many lenders faced staff shortages and additional complex income assessments that were introduced as a result of tighter lending restrictions.
As a result, product availability was reduced to manage the flow of business and some lenders continue to face Covid-related constraints.
BoE “Affordability Test might be preventing first-time buyers getting property”
In its latest financial stability report, the BoE said changes in the risks faced by UK households warranted a review of the previous recommendations implemented in March.
It said bank staff had reviewed household level data to make a preliminary assessment of the extent to which the FPC’s mortgage measures — and, specifically, the affordability Test recommendation — might be preventing first-time buyers from getting onto the property ladder.
Is the UK housing market strong?
Yes. Since lending restrictions were and continue to ease after the first national lockdown, the housing market has picked up sharply, as reported by the BoE.
Its figures show the number of mortgage approvals for property purchases increased to around 97,500 in October — their highest level since September 2007. Of course, the April Stamp Duty deadline is likely to have supported this activity too, as well as rocketing interest for houses in rural spaces in favour of flats in cities.
Will mortgage lenders loosen the constraints on lending?
In 2020, many building societies and banks withdrew lending higher, riskier loans in fear that their borrowers may fall into negative equity if property prices were to take a downturn.
Thankfully, 2021 has already seen a shift in lending behaviour, with an increase of products available and a handful of lenders providing loan-to-value rates of 90%. Other lenders may follow suit, so for those who meet the criteria, this could mean the return of the 10% deposit.
Though lower deposits can be much more attainable, having a higher deposit can help some borrowers to access lower interest rates, making the mortgage cheaper overall. There are lots of factors that affect how much deposit you’ll need and subsequently, how much interest you’ll be charged, so for clarity, just ask a mortgage broker.
How can a broker get me a good mortgage deal in 2021?
Our mortgage brokers have access to mortgage market portals with the latest interest rates and lender criteria from the leading lenders in the UK.
Their training and experience allows them to quickly, yet carefully compare mortgage deals that specifically meet the criteria for what you need. They don’t waste your time with lenders that can’t or won’t lend to you and instead, use their skillset to find an affordable mortgage with terms and conditions that make sense for your circumstances.
We’re working through the pandemic and have adapted the way we work so we can still provide crucial advice for people who need it.
Call 023 8098 0304 or let us know more using our enquiry form if you’d prefer us to contact you with the information you need.