Read more: Bank of England considers ditching affordability test.
Less stringent mortgage rules are expected to boost the ability of thousands of buyers who are planning to purchase real property, but are financially challenged.
The Financial Policy Committee (FPC) has been subjecting borrowers to two tests when taking out mortgages since 2014. The tests, namely the loan to income (LTI) flow limit and the affordability test, were meant to “guard against a loosening in mortgage underwriting standards.”
The LTI flow limit restricts the number of mortgages that can be extended at loan-to-income ratios at or above 4.5% to 15% of a lender’s new mortgage lending.
Meanwhile, the affordability test assesses a borrower’s ability to repay a mortgage, even if the interest rate went three percentage points higher than the reversion rate.
“The FPC’s affordability tests have seemed increasingly draconian over time because they refer to reversion rates – the mortgage rate you’re moved to at the end of your deal – and insist you should still be able to afford your mortgage if your rate rose to three percentage points above your reversion rate,” Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said.
Aiming to measure the effect of withdrawing the affordability test on lenders, and on the housing market, the Bank of England has launched a consultation on the issue while maintaining the LTI recommendation. The consultation will conclude on May 06, 2022.
Withdrawing the test is not without any risk for lenders and borrowers alike, Coles said.
“Letting people borrow more money looks like a risky move at a time when house prices are sky-high and the outlook is uncertain. But the Bank is convinced the extra test isn’t fair anymore and that, without it, there are still enough protections in place,” she said.
“The worry is that [withdrawing the affordability test] could mean more people able to borrow more money, which could make them vulnerable to over-stretching themselves to afford sky-high prices.
“Any weakness in the property market in the coming months could add the risk of negative equity for those who have borrowed much more. However, the bank calculates that a combination of the FCA’s affordability rules and its own rule that limits the number of mortgages with a high loan-to-income will offer enough protection.”
