BoE drops mortgage affordability tests: Industry reaction



The move by the Bank of England to ditch its mortgage market affordability test from August was broadly welcomed by the industry, although few observers expect a floodgate of new lending to come from the measure.

The Bank says it will scrap its 2014 affordability test, which specifies a “stress interest rate” for lenders to consider when assessing a potential borrower’s ability to repay a mortgage over time from 1 August.

However, it will keep its loan-to-income limit, also introduced in 2014, which limits the number of mortgages that can be extended to borrowers at LTI ratios at or greater than 4.5 times salary.

The pair of measures were brought in to make sure borrowers did not take on more debt than they could afford, and potentially exacerbate an economic downturn as happened in the 2007 financial crisis, which put the country’s financial stability at risk.  

However, the Bank says its Financial Policy Committee, following a December review, now judges “that the LTI flow limit is 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”. 

PRIMIS proposition director Vikki Jefferies welcomed the news, which she says has begun to act as a barrier to homeownership in the face of rising standard variable rates.

She says: “The Financial Policy Committee’s decision to remove the affordability stress test for mortgage applications is very welcome news for the sector. While we understand the importance of protecting borrowers from over-extending themselves, the 3% stress test on top of a lender’s standard variable rate in fact acted as a barrier to homeownership for many borrowers.

Despite its withdrawal, good controls are still in place. Now, the affordability tests that lenders – quite reasonably – need to carry out before approving loans, will be more in line with what borrowers can expect and afford to pay.

Indeed, with the Help to Buy scheme coming to an end, this decision will also assist first-time buyers, especially in London and the South East, with stepping onto the housing ladder.”

Private Finance technical director Chris Skyes claims the move will lead to a limited amount of discretion among lenders.

He says: “Recently we have seen many lenders altering their affordability calculators, both due to the rising costs of living as well as the rising interest rates that we are seeing.

This morning’s news release detailing they [the Bank of England] are withdrawing their stress testing recommendations is great news for borrowers that were becoming increasingly tight on affordability and it limiting their borrowing power with each change to affordability calculators.

This isn’t a case of the flood gates opening, in fact, whether the changed measures will even give flexibility close to that we saw when rates were 1% is a good question.

Just because the recommendations change it doesn’t mean that banks will automatically change the way they look at things, they still have a duty of care, have to be seen to be lending responsibly and also have their own internal risk committees that they would need to get any changes by. 

What this will allow is for additional discretions or innovations by lenders, perhaps it could inspire some lower stress rates for those that need it most with low income but with perfect credit and years of experience paying their rent.

We already see lower stress rates for remortgages often, as long as no additional borrowing is being taken and they have a clean credit record. This could help additional people remortgaging whose incomes have reduced due to Covid-19 changing their working circumstances for example.

The key here is that the LTI measures are still in place, so there are still large measures to protect borrowers and lenders.”

However, Quilter Financial Planning managing director Gemma Harle questioned the timing of the move by the central bank.

She says: “The timing of today’s announcement that the Bank of England is going to loosen its affordability rules is somewhat baffling and may enrage some who still have the financial crash burned into their memory. 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 Bank of England 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 a much greater impact on people’s ability to borrow.

“Although the shift in rules is one of the many attempts to help first-time buyers get their foot on the ladder it may 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.

Due to high house prices, FTBs also need very sizable 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.”