Autumn Statement Submission 2: End ridiculous affordability rules for those remortgaging

On 23 November the new Chancellor Phillip Hammond, will present his first Autumn Statement – it’s likely to contain a range of major policy announcements. As always the Treasury has invited submissions, and this year MSE and felt it was time to take them up on the offer – we’ve submitted two. The first was unfreeze the student loan repayment threshold. Here’s the second…

Autumn Statement 2016 Representation On Mortgages

Core Proposal:
In his Autumn Statement, the Chancellor should launch an urgent review of the UK’s interpretation of the EU Mortgage Credit Directive to fix the perverse and anti-competitive situation many who are remortgaging find themselves in.

Many people with existing mortgages looking for cheaper deals are being rejected, as they fail affordability checks. This happens even to some whose circumstances haven’t changed, and aren’t increasing their borrowing. Contrary to common sense, that means people are being told “you can’t afford a cheaper mortgage!”

It leaves many people as mortgage prisoners, trapped on standard variable rates (SVRs). These rates are already extremely high – currently averaging 4.5% over base rate, while before the credit crunch they were typically 1%-1.5% above base. This leaves us with a mortgage ticking time bomb if interest rates do rise, with arrears and repossessions of potentially horrifying proportions.

There is nothing wrong with affordability checks – especially for new mortgages. People should not be getting homes they can’t afford. However, when we have a situation where even some overpaying their current mortgage are being told they can’t afford a cheaper deal, the system is broken.

We believe it is possible within the framework of the EU Mortgage Credit Directive to reinterpret how these checks are done, and would ask the Chancellor to ensure this happens with great urgency. 

In recent years the Financial Conduct Authority’s (FCA’s) Mortgage Market Review and then the EU’s Mortgage Credit Directive have required lenders to conduct stricter affordability checks for mortgage applicants. In terms of preparedness for future rate rises, this is a laudable aim, but one consequence is a detrimental impact on some consumers trying to remortgage.

Confusion over the cause of this detriment
There has been no forthcoming solution to help people in this situation, although the problem has been acknowledged. The FCA’s final policy statement[1] on implementing the Mortgage Credit Directive includes:

We are making a change to align with the MCD affordability requirements to ensure that an affordability assessment is conducted when a customer remortgages with a new lender, even where there is no additional borrowing. As MCD implementation is driving the changes to the exceptions we offer under our existing rules, we (as before) present only a high level CBA here. This change may lead to a set of customers becoming trapped in contracts with unfavourable terms, leading consequently to some of these customers suffering payment difficulties, and in the extreme, default. The impact might not be very large in the low interest environment of today, but could become more severe were base rates to rise.

Following a meeting between Martin Lewis and Jonathan Hill, the former Commissioner for Financial Stability, Financial Services and Capital Markets Union, the European Commission issued a statement, on 14 December 2015. This said that the stricter tests do come from the UK’s Mortgage Market Review – not EU legislation. Meanwhile, the FCA has insisted that the checks are a result of the EU’s Mortgage Credit Directive.

Future implications of this issue
The current lack of competition in this market is trapping people on their existing products once they move on to the SVR. In a market based on switching, this has created a ticking time bomb under the personal finances of affected customers. Once base rate begins to rise, their mortgage payments will be even higher, and they will have missed out on the chance to increase their savings by being on a cheaper remortgaged rate. In addition, the cumulative impact of this effect on personal finances could also have macroeconomic implications.

Intervention from the Government could solve this impasse
As neither the regulator nor European Commission has been able to remedy this situation, the Government should now intervene to prompt a solution.

Former Chancellor George Osborne did write a letter to mortgage lenders in May 2016, reminding them that there is flexibility in the rules to allow them to not apply affordability checks when their existing customers apply to remortgage.

This was a welcome intervention, which did help some customers, but it did not rectify the bigger picture by enabling people to move to different providers. It actually results in an anti-competitive playing field – meaning some are only able to switch if their existing lender allows.

Alongside Government policies designed to fix other areas of the housing sector, it is also vital that policy supports a healthy and competitive market for those who wish to remortgage.

Opportunity for a solution
In his Autumn Statement the Chancellor should now look at this issue afresh. We recommend that he takes the opportunity to announce a summit in which he will call together relevant stakeholders from the regulators, industry and consumer groups, or a consultation, through which a policy solution can be found.

The current affordability checks are having an unintended side effect of adversely affecting competition in the remortgaging market. This is harming individuals and their family finances, and storing up problems for the wider economy. Allowing existing mortgage holders access to the whole of the market when it’s time to switch will improve their personal finances and help support the economy as a whole.

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[1] FCA, ‘Implementation of the Mortgage Credit Directive and the new regime for second charge mortgages, feedback to CP14/20 and final rules’