The Bank of England (BoE) has announced that its Financial Policy Committee (FPC) is to move forward with a consultation on withdrawing its affordability stress test for mortgage applications.

The FPC is seeking views on how the mortgage market would respond if the affordability test was removed, with the consultation to close on 6 May 2022.

In 2014, the FPC introduced two recommendations to guard against a loosening in mortgage underwriting standards and a material increase in household indebtedness that could in turn amplify an economic downturn, and so increase financial stability risks.

The recommendations introduced were the loan-to-income (LTI) flow limit, which limits the number of mortgages that can be extended at LTI ratios at or greater than 4.5, and the affordability test, which specifies a stress interest rate for lenders when assessing prospective borrowers’ ability to repay a mortgage.

In the FPC’s latest review, published in the December 2021 Financial Stability Report, the committee judged that the LTI flow limit, without the affordability test recommendation, but alongside the wider assessment of affordability required by the FCA’s Mortgage Conduct of Business (MCOB) framework, ought to deliver an “appropriate level of resilience” to the UK financial system, but in a “simpler, more predictable and more proportionate way”.

Therefore, as announced in December 2021, the Committee decided to maintain the LTI flow limit recommendation and to consult on withdrawing its affordability test recommendation.

Executive director for the Intermediary Mortgage Lenders Association (IMLA), Kate Davies, commented: “After proposals on the topic last year, today’s announcement of a consultation on removing the affordability stress test for mortgage applications will come as no real surprise to the sector, but is still very welcome.

“For some time, IMLA has been arguing that the combination of FCA MCOB rules, LTI limits and the 3% stress test have placed unrealistic demands on borrowers when compared to the rates they have actually been paying, or could expect to pay.
 
“We are particularly interested in the FPC’s analysis that the LTI flow limit is likely to play a stronger role than the affordability test in guarding against household indebtedness, and we shall be considering each measure’s relative effectiveness carefully as we develop our response to the consultation.”

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