The Bank of England (BoE) announced yesterday that its Financial Policy Committee (FPC) will withdraw the so-called mortgage market affordability test, designed to avoid another 2007-style credit crunch.
Introduced in 2014, the test specifies a stress interest rate for lenders when assessing prospective borrowers’ ability to repay a mortgage.
“Following its latest review of the mortgage market, the Financial Policy Committee has confirmed that it will withdraw its affordability test Recommendation,” the BoE said in a statement.
The move means that lenders will no longer have to check whether homeowners could afford mortgage payments at higher interest rates.
The decision to withdraw the affordability test comes despite the Bank of England having raised interest rates for a fifth time in a row to 1.25% last week as part of efforts to tackle soaring inflation, meaning some mortgage borrowers could be in line for higher repayments.
The Bank of England, which originally consulted on the changes in February, confirmed that it would scrap the affordability test after determining that other rules, including those that cap mortgages based on the income of borrowers, were “likely to play a stronger role” in guarding against an increase in household debt.
Some experts yesterday described the rule changes as “baffling” in light of rising interest rates. But Mark Harris, chief executive of mortgage broker SPF Private Clients, believes the move could prove sensible.
He said: “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. Lenders will also still use some form of testing but to their own choosing according to their risk appetite.
“It could have a positive affect on certain borrowers who have been disadvantaged when it comes to getting on the property ladder. For example, first-time buyers who have been affording rents far in excess of actual mortgage payments but have failed affordability assessments regardless.
“The rate environment and expectations have changed significantly since the rules were introduced when borrowers were tested to ensure that mortgage repayments could be met should rates be in the region of 6% to 7%.”
Lawrence Bowles, director of research at Savills, believes that from a market perspective, removing the current stress testing “could mitigate some of the impact of higher interest rates”.
He commented: “In theory, at least, it should open up a little more capacity for house price growth than is currently looking fairly constrained in the mainstream housing market.
“This said, a fairly high proportion of recent buyers have worked around the “standard variable rate plus 3%” stress test by locking into five-year fixed rates, meaning it will only preserve or open up additional borrowing capacity for part of the market. Lenders will still stress test applicants to reflect where they expect interest rates to be five years from the start of the loan, following the Mortgage Conduct of Business rules.
“Improved capacity for growth would also be dependent on how far lenders are prepared to push loan to income multiples under responsibly lending rules and caps on what they can lend at high loan to income ratios. It is unlikely to open up the mortgage-credit floodgates.
“It should allow lenders to be slightly more flexible which will come as welcome relief to some would-be-buyers struggling to keep up with current criteria because of significant price growth of the past two years – but saving for a deposit will remain the most significant barrier to home ownership.”