The Bank of England has again maintained the base rate at 0.5% this lunchtime, with many being left confused by inconsistent messages emerging from the Bank's chief, Mark Carney, about when rates may increase. In a further worrying move by banks, borrowers are now also being advised by their lenders that they cannot change existing high-rate variable mortgages to lower rates, and blaming new affordability rules that were backed by the Bank of England.
Mr Carney started his tenure as Governor last Summer, with the prediction that unemployment falling below 7% would trigger a review of the historically low rate, which wasn't expected to happen until 2016. The comment was quickly re-qualified in January this year, when the unemployment figure dropped faster than expected, down to 7.1%, with the Bank of England making reference to wage growth being muted and therefore the timing not being right to increase rates any time soon.
Since then UK house price reports have steadily increased, particularly in the capital, threatening to derail the UK economic recovery. As a result, warnings were issued by senior international economists, like Christine Lagarde, Chief of the IMF, to warn that the biggest threat to a UK economic recovery was unsustainable house price inflation. Carney reacted to this, and made moves to further tighten regulation on the banks around mortgage lending.
Following the launch of the Mortgage Market Review in April 2014, the biggest shake-up of existing lending rules for over a decade, the Bank of England enforced lending caps on the banks, with a multiple of no more than 4 times income for large loans in excess of £500,000. This was expected to curb London prices in particular, where a lot of the larger loans were being granted. RBS and the Lloyds Banking Group, both majority owned by the Government, launched these lending caps within days of each other.
Further rules have now been launched to cap any lending multiples of 4.5 times income to a maximum of 15% of overall mortgage lending from October 2014. This is again primarily aimed at the London property market. Whilst the new rules from the Bank of England have successfully slowed down the number of mortgage approvals, the traditional indicator of future house price growth, there is increasing concern from many borrowers around the messages they are receiving from existing banks when trying to the switch their mortgage onto a lower rate.
Comments made by Martin Wheatley, Chief Executive of financial regulator the Financial Conduct Authority, made the following comments recently around banks telling existing customers to remain on high rates due to the new affordability rules.
“Some lenders are not approaching the rules in the spirit that they were intended. Lenders have to decide what level of risk they are prepared to take. That’s reasonable. But every firm also has a responsibility to treat their customers fairly and we would expect them to put good customer outcomes at the heart of everything they do. Leaving customers on higher-rate deals doesn’t fit with either of those criteria.”
Andy McBride, Business Development Director at specialist broker Contractor Mortgages Made Easy, commented on the questionable tactics of the banks when reviewing existing borrowers, particularly in the context of a rising property market.
“Any contractor who is told by their existing lender that they cannot switch to a new cheaper interest rate due to affordability issues, needs to ensure that the lender appreciates their gross contract income, and isn't just using company drawings or salary to define the income that demonstrates affordability. Unfortunately, banks are less inclined to define income via the contract directly for existing borrowers, but can do so via certain brokers.
“With the UK housing market accelerating rapidly, it is vital that all contract income is deemed relevant when lenders stress-test affordability. New rules for lenders mean that they need apply a 3% loading on the interest rates when performing this stress test, therefore it is vital they understand how contractors work.”
Article By:Taj Kang, Business Development Director at Contractor Mortgages Made Easy
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