The Bank of England is set to consult on withdrawing its affordability test recommendation, which makes lenders ensure that borrowers would be able to afford their mortgage if the interest rate was 3% than their reversion rate, in the first-half of next year.
In its latest Financial Stability report, the Financial Policy Committee (FPC) said that it would maintain its loan to income (LTI) for residential mortgage recommendations, which asserts that 15% of the total number of new residential mortgages should not have a LTI ratio at or greater than 4.5. This applies to lenders whose residential mortgage lending is above £100m per year.
The FPC said that the LTI measure was more effective at reducing risk in a housing boom and also had less impact on borrowers in normal times.
It added that the FCA’s rules on affordability test combined with the FPC’s LTI limits “should be enough to protect UK financial stability”, and that it would also “make the rules simpler”. Therefore, it would consult in the first quarter of next year on withdrawing its affordability measure.
The FPC’s mortgage market recommendations, which it introduced in 2014, strengthened affordability assessments to prevent consumers from taking on unaffordable mortgages and made firms consider the impact of future interest rate rises on affordability.
Reports earlier this week had suggested that homebuyers could be allowed to borrow up to six or seven times their income, as opposed to 4.5 currently. The change would have allowed borrowers to take out larger loans, and potentially open up the housing market to younger borrowers who may need to borrow more to get their foot on the property ladder.
The FPC said that it was reviewing the measures in December last year and said that it would report the conclusions in the second half of this year.
Paul Broadhead, head of mortgage and housing policy at the BSA, said: “We welcome the Financial Policy Committee’s intention to withdraw the affordability stress test for new mortgages.
“This measure mainly impacts certain borrowers, such as first-time buyers and those looking to buy in the South East, who can clearly afford a mortgage but are hindered by the requirement to test that they could still pay their mortgage if rates were in the region of 6%+.
“Lenders will continue to check that a mortgage is affordable both now and if interest rates increase in line with market expectations.”
