Getting rid of the standard variable rate (SVR) and loan-to-income (LTI) caps could boost housing affordability and get more people owning their homes, Arjan Verbeek, CEO and founder of Perenna, said.
Speaking on a panel on the subject of affordability at Mortgage Advice Bureau’s (MAB’s) annual conference, Verbeek said people sometimes blamed the rate environment for weakened housing affordability, but he said it was “not different from pre-2007″. He said some people blamed regulation and said there were some issues with this, but much of the regulation resulted from practices that occurred before 2007.
He said the shorter-term products available, as well as the SVR, were a “big problem” when it came to affordability as this increased the required deposit.
“As an industry, we can make the housing market more affordable and get people bigger mortgages if we just decide to abolish the SVR,” Verbeek added.
Housing plays an important role in the UK’s economy
Robert Sinclair, chief executive of the Association of Mortgage Intermediaries (AMI), said the hindrance to affordability was that the UK housing market was “such a big part” of UK plc’s value chain. He said the total equity of UK property was “bigger than the total of defined benefit, defined contribution, pension schemes and all the investment people have in the stock market and in savings”.
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Sinclair said that meant if anything happened to house values, it would have a knock-on effect on the stability of the UK economy.
For this reason, Sinclair said, controlling house price inflation and lending sensibly “has been the big watchword for the Bank of England and the PRA [Prudential Regulation Authority] in their current iteration of thinking”.
Sinclair said this needed to be thought about differently to move affordability forward.
“The regulators are stuck in this mindset that says ‘things went really badly in 2007’. But the reality is, things did not go really badly in 2007. Whilst there were problems in international capital markets, there [was] not a huge [number] of people going into default or repossessions,” Sinclair added.
He said the risk was there had been no testing of the current system on affordability, as people had been able to continue paying their mortgages.
He said regulators were also scared there was no upside to changing the rules.
Stifling growth
Verbeek said when the Financial Policy Committee (FPC) consulted on removing the stress test, Perenna wrote to the body telling it to remove the LTI cap instead.
He said this was more than an affordability measure, it was a macro policy cap to create “stability of the graveyard”, a phrase used to describe financial policy that is so resilient that it can limit activity and harm the economy.
“They’ve really killed the housing market,” Verbeek added, saying the number of mortgage accounts had fallen since 2007 despite the population growing.
He said removing the LTI cap and keeping the stress test would incentivise lenders to create new products.
“We’ve spoken to the big lenders, if there was no LTI cap, they would put longer fixed rates out there,” he said.
Verbeek said lenders wanted to tap into the potential market.
Speaking of other, less common types of lending, Claire Cherrington, head of strategic and technology partnerships at Lloyds Banking Group (LBG), said 100% loan to value (LTV) mortgages were not necessarily the answer, as people hit affordability before they reached that limit.
She also said people tended to self-regulate and did not always want all that debt to ensure they “have a life alongside having a mortgage”.
Cherrington said shared ownership had its problems, but was an important proposition in helping people get onto the ladder and away from renting.
Ben Thompson, panel chair and deputy CEO of MAB, said he was usually “quite dismissive of long-term fixed rates in the current market”, but said there was a place for them in the growing market.
Verbeek said it was easier to get to 100% LTV if there was no payment shock.
He said when it came to discussions around high LTVs or LTIs, the “missing bit” was long-term fixed rate mortgages.
“It is about customer vulnerability, having good outcomes means not seeing your mortgage payments quadruple. Because interest rates do go up even if we expect them to go down, as we’ve just seen, so you cannot take that risk on your house,” Verbeek added.
Verbeek said in a healthy economy, long-term fixed rates could make up 30% of the market.
