BoE’s mortgage affordability test to be withdrawn

The Bank of England (BoE) has confirmed that it will withdraw its mortgage affordability stress test.

This change is due to come into effect from 1 August.

Introduced in 2014, the BoE’s affordability test specifies a stress interest rate for lenders when assessing a prospective borrower’s ability to repay a mortgage. The other recommendation, the loan to income (LTI) ‘flow limit’, which is not to be withdrawn, limits the number of mortgages that can be extended to borrowers at LTI ratios at or greater than 4.5.

According to the BoE’s Financial Policy Committee (FPC), the latest recommendations have been introduced to “guard against a loosening in mortgage underwriting standards” and a “material increase in household indebtedness”, that could in turn amplify an economic downturn.

The FPC consulted in February 2022 on the proposal to withdraw the affordability test and maintain the LTI flow limit, with the majority of responses supportive of the proposals. Lenders will not need to make any changes as a result, as the Bank stated that current affordability assessments should already be compliant with the FCA’s Mortgage Conduct of Business (MCOB) framework.

Commenting on the BoE’s change, managing director at Quilter Financial Planning, Gemma Harle, criticised the timing of the test’s withdrawal and labelled it as “baffling”.

“The timing of today’s announcement that the BoE is going to loosen its affordability rules is somewhat baffling and may enrage some who still have the financial crash burned into their memory,” she commented.

“With interest rates starting to creep up to meet the damaging impact of inflation and soaring energy and food prices you would think that people's ability to afford their mortgage should really be under the spotlight now. However, this move by the BoE may illustrate that the long-term health of the housing market is predicted to be less than rosy, and this change is a means to guard against a real slump in house prices.

“While it is potentially bad timing for the announcement, the change in the affordability rules may not be as significant as it sounds as the LTI ‘flow limit’ will not be withdrawn, which has much greater impact on people’s ability to borrow.”

Harle also warned that while the Bank’s shift in rules is likely an attempt to help first-time buyers get their foot on the housing ladder, the withdrawal of the affordability test could end up having the “opposite effect”.

“One of the main drivers behind ‘generation rent’ is the fact that house prices have massively outstripped wage growth,” she added. “Due to high house prices, first-time buyers also need very sizeable deposits and in the current fiscal environment saving this type of money will be very difficult due to increasing rents and the cost of living.

“On top of this, inflation will be eating away at any other savings they have sitting in cash. 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.

“Ultimately, one of the key strategies the government should adopt to help first-time buyers onto the ladder is simply to build more stock. This has a natural effect of stabilising house prices and bringing them down due to the laws of supply and demand. This will be the only way of really helping the masses get onto the housing ladder.”

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