The move by the Bank of England to ditch its mortgage market affordability test in August has been branded as “utter madness” at a time when the UK faces an economic downturn, according to the head of one leading financial adviser.

DeVere Group chief executive Nigel Green says: “This move by the Bank of England is bizarre, to say the least. The current affordability checks include a stress test to cover rising interest rates in order to avoid another 2007-style credit crunch.

“To scrap this important check to try and ensure borrowers don’t take on more debt than they could afford, at a time when rates are rising and the UK is facing a significant economic downturn, is utter madness.

Yesterday the Bank said 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 said 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”.

The move by the central bank after its Monetary Policy Committee last week voted to increase the bank rate by 0.25 percentage points, to 1.25%, the fifth rate hike in a row since December after a decade of historic lows. 

The committee expects inflation, currently at a 40-year high of 9%, to hit 11% in October, driven by energy and food rises. 

The UK economy contracted by 0.3% in April after it shrank by 0.1% in March, the Office for National Statistics also said last week. Many economists forecast the UK economy will fall into a recession over the next 12 months.

DeVere’s Green adds: “To many, this move will underscore how the Bank of England is floundering in its duty of care and therefore failing Britain in these uncertain times.

“Its response to fighting red-hot inflation, which is at its fastest rate in four decades, has been slow off the mark, hitting households and businesses hard.

“It has failed to mention how Brexit is a negative drag on the supply side.

“And global investors are now being warned to hedge against an ‘existential’ crisis with the pound by Wall Street analysts as the British currency faces issues usually only seen in emerging markets.”

“While sterling strengthened 0.2% in May, it remains the third-worst performing major currency this year. It has weakened 8% to $1.2468 in 2022.”

However, the central bank’s move on affordability tests was broadly welcomed by the industry, although few observers expect a floodgate of new lending to come from the measure.

Legal & General Mortgage Club director Kevin Roberts welcomed the move but said that boosting housing supply was the long-term solution opening up the market to new buyers.

He says: “The decision by the Bank of England to withdraw its affordability requirement, shows how seriously it is taking the challenges currently facing first-time buyers in particular.

“For some potential borrowers trying to get onto the property ladder this will be a welcome change, but the numbers helped by the change will likely be quite small and this move is unlikely to have a huge impact on the wider market.

“The market is currently working through high transaction volumes, driven both by buyers looking to move and improve, as well as a significant number of people whose current deals are expiring in a rising market and who are keen to use an adviser to lock into new deals. Frequent re-pricing by lenders is also providing further challenges to consumers and advisers. All of this means that the real benefits of this move will likely not be seen until greater stability returns to the market.

“Ultimately, it’s positive that the Bank of England is addressing the problem of affordability and has consulted the industry and listened to its concerns. We should be clear though that this move is no silver bullet. If we really want to support first-time buyers, then we also need more serious long-term investment to boost the UK’s housing supply.”

PRIMIS proposition director Vikki Jefferies also 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.

“The 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 also 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.”