For the first time in September this year, mortgage approvals were lower than they were for the same month last year (see table).
Approvals have been falling gradually for most of this year, but September is the first month in which they were lower than the same month the year before. Moreover, it seems likely that this will also be true for the next three months, partly because there was a steep rise in approvals at the tail end of last year which won’t be matched this year.
It’s hard to avoid the conclusion that mortgage lenders and the Bank of England have stamped harder on the brakes than was necessary.
No doubt, some borrowers are being put off by fears of increases in interest rates, but it’s unlikely that the slow-down in approvals is entirely attributable to consumer concerns about rising mortgage payments.
It seems much more likely that the Mortgage Market Review (MMR, you can find out more about it here) is having more of an impact than expected. And new rules on the proportion of mortgages that can be made available at high multiples of income (more here) which came in to force in October may have made lenders more cautious still.
The MMR was designed to ensure that borrowers could afford to repay their mortgage, even if interest rates rose sharply. All of which makes perfect sense.
But the way the rules are currently applied means that lenders make no allowance for the ability of a borrower to reduce their spending elsewhere if their mortgage costs rise.
Indeed, so strictly are the rules being applied that Pensions Minister Steve Webb has written to the Council of Mortgage Lenders urging banks and building societies not to take pension payments in to account when calculating mortgage affordability (more on that here).
And he’s right. Pension payments are discretionary – you can suspend them if you need to. The same is true for a raft of other things. The Money Advice Service, for example, says that lenders will take in to account your spending on things such as cinemas and nights out, TV subscriptions and gym membership. But these are exactly the sort of things you drop if other financial commitments – such as a rise in mortgage costs – make it necessary.
The rules requiring lenders to calculate affordability in the event of a rate rise are also unnecessarily draconian. The Bank of England requires lenders to assess affordability if the interest rate payable on a mortgage rose by 3% over the next five years. But the Bank itself acknowledges that the City expects rates to rise by just 1.75% over the next two years and Governor Mark Carney has said several times that rates will not return to their ‘normal’ levels for many years.
To be fair to the lenders, they are terrified that the Bank of England will penalise them in the event of defaults if they can’t prove that they took every possible item of expenditure in to account. But the impact of the way they have implemented MMR is to deprive perfectly creditworthy borrowers of the opportunity to buy their home.
They and the Bank of England should get together to agree that discretionary spending is not included in the affordability calculations and to reduce the potential rise in interest rates that lenders have to allow for.