BoE scraps mortgage affordability test

The Bank of England’s Financial Policy Committee (FPC) has confirmed that it will withdraw its affordability test recommendation, effective from 1st August.

This follows previous consultations on the proposal to remove the affordability test conducted in February, which received support from the majority of responders.

The other recommendation, the loan to income (LTI) ‘flow limit’, will not be withdrawn.

In its latest review, published in the December 2021 Financial Stability Report, the FPC judged 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 bank believes 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, will deliver the appropriate level of resilience to the UK financial system, but in a simpler, more predictable and more proportionate way.

Commenting on the announcement, Vikki Jefferies, proposition director at PRIMIS, said: “The FPC’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 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, which lenders need to carry out before approving loans, will be more in line with what borrowers can expect and afford to pay.

“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.”

Mark Harris, chief executive at SPF Private Clients, added: “Scrapping the affordability test is not as reckless as it may sound.

“The LTI 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 effect 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.”

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