Bank Of England’s Financial Policy Committee Withdraw Mortgage Market Affordability Test
In potentially welcome news for prospective homeowners, The Bank of England’s Financial Policy Committee (FPC) has announced that their previously recommended mortgage market affordability test will be removed in August 2022. With property giants, Rightmove, confirming an average house in the UK now costs a ‘record-high’, £368,614, will this move be a help or hindrance to hopeful property buyers?
Stress test removed
If you’ve taken out a mortgage (or tried to) since 2014, then your lender would have applied what’s known as a ‘stress test’ when calculating your affordability for the loan. The stress test was recommended by the BofE’s FPC back in 2014 and specified that lenders ensure that applicants could not simply afford the monthly mortgage repayments agreed upon, but would continue to be able to afford repayments following a (theoretical) 3% rise in the Bank of England’s base rate.
This measure was introduced in an attempt to ensure UK borrowers en masse didn’t take on an unaffordable level of debt. The BofE were concerned this may cause “household indebtedness that could, in turn, amplify an economic downturn and so increase financial stability risks.”
The BofE committee consulted on this amendment to the mortgage market guidelines in February 2022, with an overwhelmingly positive response. It was largely felt that the Financial Conduct Authority’s MCOB (Mortgage Conduct of Business) responsible lending rules are extensive enough to prevent the aforementioned debt crisis, when applied alongside the LTI (Loan to Income) flow limit.
What about the LTI (Loan to Income) flow limit?
The LTI flow limit, which was introduced at the same time as the mortgage market affordability test in 2014, imposes a limit on the number of mortgages that lenders can offer at a ratio above 4.5 LTI. This essentially means that lenders are unable to offer more than 4.5 times the household income for the majority of applicants, with the relatively small percentage of higher-income multiple loans reserved predominantly for professionals and high-net-worth individuals.
This measure was considered “likely to play a stronger role than the affordability test in guarding against an increase in aggregate household indebtedness and the number of highly indebted households in a scenario of rapidly rising house prices.” by the BofE’s FPC, and, therefore, will remain in place for the foreseeable future.
What does this mean for the economy and those struggling to get onto the property ladder?
Mixed opinions have been offered on the removal of mortgage affordability testing at a time when inflation is at a 40-year high, and some industry experts have raised their concerns and confusion about the timing of this announcement. For many industry veterans, the not-too-distant memory of the 2008 financial crash is still looming, and it’s been suggested that this move underscores the serious potential for a future housing market crash.
There are also concerns that the move could exacerbate the current rise in housing prices, creating a knock-on effect on the lack of affordable homes. Gemma Harle, managing director at Quilter Financial Planning stated that “House prices have become further and further out of reach for prospective buyers and this change in the affordability rules could perpetuate unsustainable further growth as it steps up demand in a market already suffering with limited stock.”
Interest still rising
Moneyfacts.co.uk, a well-known financial website, has questioned how much more possible the removal of mortgage affordability tests will make it for prospective buyers to get onto the property ladder, given that the average SVR (Standard Variable Rate) reached 4.91% in June 2022, the highest since records began. In fact, even those on fixed-rate deals are experiencing the least competitive rates since 2014, with the average two-year fixed-rate deal reaching 3.25%.
However, Mark Harris, CEO of Mortgage Broker SPF Private Clients, felt that the “Scrapping of the affordability test is not as reckless as it may sound. The loan-to-income framework remains so there will still be some restrictions in place; it is not turning into a free-for-all on the lending front.”
Furthermore, Mark felt that “It could have a positive effect on certain borrowers who have been disadvantaged when it comes to getting on the property ladder.” This could be welcome news to first-time buyers considering their next move. If you’ve failed affordability tests in the past, it may now be worth consulting a broker so that they can weigh up your current circumstances against the post-August affordability criteria.