Bank of England mortgage affordability changes come into force

The Bank of England's changes to mortgage affordability rules take effect from today.

Related topics:  Mortgages,  Regulation
Rozi Jones
1st August 2022
Bank of England BoE
"It could have a positive affect on certain borrowers who have been disadvantaged when it comes to getting on the property ladder."

In June, the Bank confirmed the withdrawal of the affordability test Recommendation following a mortgage market review.

Introduced in 2014, the test specifies a stress interest rate for lenders when assessing prospective borrowers’ ability to repay a mortgage. The test required lenders to calculate whether borrowers would be able to cope if interest rates climbed by up to 3%.

The other Recommendation, the loan to income (LTI) ‘flow limit’, which will not be withdrawn, limits the number of mortgages that can be extended to borrowers at LTI ratios at or greater than 4.5.

The Recommendations were introduced to guard against a loosening in mortgage underwriting standards and a material increase in household indebtedness that could in turn amplify an economic downturn and so increase financial stability risks.

In its latest review, published in December 2021, the Bank's Financial Policy Committee judged that the LTI flow limit is likely to play a stronger role than the affordability test in guarding against an increase in household indebtedness and the number of highly indebted households in a scenario of rapidly rising house prices.

Therefore it judged that the LTI flow limit without the affordability test, but alongside the wider assessment of affordability required by the FCA’s Mortgage Conduct of Business (MCOB) responsible lending rules, would deliver the appropriate level of resilience to the UK financial system, but in a "simpler, more predictable and more proportionate way".

Mark Harris, chief executive of mortgage broker SPF Private Clients, 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 per cent."

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