She said: “The mortgage stress rate is a big consideration for lenders when assessing the affordability of a customer. However, it is only one of three main variables to consider for customers.
“Those looking to get a mortgage will need to consider the mortgage affordability test, the loan-to-income (LTI) cap, and a deposit.”
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.
In 2014, the Financial Policy Committee (FPC) began subjecting borrowers to two tests when taking out mortgages.
These were meant to guard against a loosening in mortgage underwriting standards, which, in turn, could lead to a material increase in aggregate household debt.
However, the Bank of England recently announced the possibility of withdrawing its mortgage affordability test.
This is currently in place to ensure borrowers can keep up with mortgage repayments in the face of an interest rate hike.
It is believed that less stringent mortgage rules will boost the ability of thousands of buyers who are planning to purchase a property, but are financially challenged.
Harris said: “This is a very interesting time for the Bank of England to be considering removing the mortgage affordability test.”
As a result of the pandemic, the market has undergone a lot of changes and it has become harder for borrowers and lenders as the economy has struggled due to COVID.
She added: “I believe there is a question around whether the Bank of England really wants to introduce these changes in this market.
“Not in principal, but whether it is beneficial for the market and the economy as a whole.”
With the intention 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.
The Bank of England had previously pointed out that responsible lending rules under the Financial Conduct Authority’s Mortgage Conduct of Business (MCOB) would continue to apply as an appropriate affordability check.
Harris explained that while this change would have an impact, she was unsure whether it would have the impact that the Bank of England anticipates.
This is because she believes by removing the mortgage affordability test, it only negates one of three main barriers to homeownership.
She said: “I believe this is a very odd time to introduce these changes and you also have to consider whether lenders want these changes, and whether they will go ahead and implement them themselves.”
Harris thinks that some lenders will follow the Bank of England’s recommendations, but an equal amount will choose not to.
She said: “Lenders are very cautious largely as a result of the financial crash in 2007/2008, so I am unsure the Bank of England will see it become drastically easier for people to purchase property through its changes.”
The pandemic has not had quite the same impact on the market and the economy as the 2007/2008 financial crash did. Many within the industry believe this is because people have learnt from the mistakes they made before, which has helped to avoid a similar outcome this time around.
The 2007/2008 crash was caused by predatory lending which targeted low-income homebuyers, as well as excessive risk-taking by global financial institutions, and the bursting of the United States housing bubble. Mortgage-backed securities (MBS) which were linked to American real estate, and a wide range of derivatives linked to those MBS, collapsed in value.
However, while the market is in better shape than it was during the previous market crash, Harris explained that it is still volatile, and, for the most part, it is difficult to anticipate the future.
She said: “The market right now is volatile and unpredictable, so I believe this change will ask more questions than it answers.”
