Bank of England considers ending mortgage affordability test – what this means for UK mortgages

The consultation will run until May
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  • The Bank of England is considering dropping the affordability test for mortgage lenders. The consultation by the Financial Policy Committee over whether to withdraw the mortgage affordability test began yesterday and will close on 6th May 2022.

    Borrowers are currently subjected to two test recommendations that limit how much they are able to borrow when applying for a mortgage.  These were introduced in 2014 by the Financial Policy Committee to help guard against an increase in household indebtedness that could make an economic downturn worse.

    The first recommendation is the ‘flow limit’ which limits the number of mortgages that can be extended at loan to income ratios or greater than 4.5. The ‘affordability test’ is the second test that specifies a stress interest rate for lenders when working out a borrower’s ability to repay a mortgage.

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    Image credit: Future PLC

    The Bank of England has launched a consultation to review ending the affordability test recommendation, whilst keeping the ‘flow limit’ in place. The consultation paper said that: ‘the FPC judged that the LTI flow limit, without the affordability test Recommendation, but alongside the wider assessment of affordability required by the FCA’s Mortgage Conduct of Business (MCOB) framework, ought to deliver an appropriate level of resilience to the UK financial system, but in a simpler, more predictable and more proportionate way.’

    What impact would the removal of the affordability test have on mortgages?

    The new measure would mean borrowers and first-time buyers are able to borrow more for a mortgage. However, Tayo Oguntonade a Qualified Mortgage advisor and Brickz with Tipz founder, points out that many first time buyers, who are currently renting, will already easily pass the affordability test when securing the best first-time buyer mortgages.

    ‘What the affordability test does, it looks at if you could still afford your monthly payments if interest rates were to increase by a drastic amount. And for most people that affordability test is relatively easily passed,’ Tayo says. ‘Especially as renters are paying more in rent right now than they would for the equivalent mortgage.’

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    Image credit: David Merewether

    ‘They’re looking to take away or make some changes to the affordability tests, but they’re leaving the loan to income ratios in. And I think the loan to income ratio is really the one that has the most impact on people buying a property right now.

    ‘The loan to income ratio is where most lenders will give you 4.5 times your income, effectively. So that is the maximum loan that they’ll give you and most people find that’s what stops them getting a big loan, rather than the affordability tests.’

    In the event of a decision being made to withdraw the affordability test after the consultation process, The Bank of England said it expects the test to be formally withdrawn by the FPC within 12 months of the decision.

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