Affordability Test Scrapped: Is it Really Easier to Get a Mortgage Now?
In June, the Bank of England’s Financial Policy Committee (FPC) made the decision to remove the requirement for lenders to carry out a mortgage market affordability test. On the day that decision comes into effect (August 1st 2022), we look at how much of an impact, if any, this move will have on your ability to get a mortgage.
What exactly has changed?
The mortgage market affordability test, commonly known within the industry as the ‘stress test’ has been removed as of today. This requirement was implemented back in 2014 to prevent borrowers from overextending their borrowing, and made it compulsory for lenders to ensure that applicants would still be able to afford their mortgage repayments in the event of a theoretical rise in interest of up to 3%.
Whilst this is no longer a legal obligation for lenders, some may continue to use similar criteria as part of their individual risk management processes. It’s also important to note that the main affordability requirement used to assess mortgage applications, the loan to income flow limit, remains unchanged.
What is the loan to income (LTI) flow limit?
This measure limits the loans that lenders are able to offer to 4.5 times an applicant’s household income, in the vast majority of cases. They have a degree of flexibility to offer more than this to a small percentage of clients at their own discretion, however, borrowing above 4.5 LTI is typically reserved for certain professionals, high net worth applicants and those with very strong applications in general.
In fact, the main reason that the Bank of England’s Financial Policy Committee felt confident in the removal of the stress test was down to their certainty that the LTI flow limit is a strong enough measure in itself, to prevent overextended borrowing in the current market.
Will it be any easier for me to get a mortgage?
Of course, this is the golden question that everyone is asking. As with most mortgage-related matters, however, it will depend on your individual circumstances. There are certainly some people that may potentially benefit from the removal of the stress test, for example, applicants with a fluctuating income, such as the self-employed or freelancers, who may now find it easier to meet the affordability criteria.
In reality, however, the vast majority of borrowers are unlikely to find it much easier to get a mortgage today than they would have done before the stress test was relaxed. The LTI flow limit remains strictly in place and the most important factor in a lender’s decision-making process. Applicants will still need to meet largely the same affordability criteria as they would have done previously. With interest rate rises no longer theoretical, having already risen a number of times this year and expected to continue to do so over the next 12 months, it’s doubtful that mortgage affordability will become more attainable for many.
Mark Yallop, chairman of the Financial Markets Standards Board, feels that “The biggest constraint on new mortgages is the ability of borrowers to afford a deposit”.
With house prices at an all time high, larger deposit requirements may very well impact prospective homeowners ability to get on the property ladder as much as any affordability test, however, there are low deposit mortgages available, and a whole of market broker will be able to help you secure a lender offering this type of deal.