Bank of England scraps mortgage affordability test
These exciting headlines have been filling our newsfeeds the last few days, but what does this change actually mean for new borrowers? Surely lenders won’t be handing out bags of money without so much as a glimpse of a payslip? Or are we returning to the pre-financial crash, Wild West lending days of old?
What’s it all about?
Following a mortgage market review back in 2014, the Bank of England introduced a set of measures for mortgage lenders to implement when working out affordability. This particular rule compelled lenders to start applying a “stress test” to the borrower’s new mortgage.
The stress test was designed to ensure that the mortgage payments were not only affordable on the day of application, using the current relatively low interest rates of the time, but would also remain affordable even if the borrower ended up on the lender’s Standard Variable Rate (SVR) and interest rates increased in the future – by up to an additional 3%.
The test was supposed to be a measure to protect new borrowers, as at the time the test was created, interest rates were predicted to rise by up to 2% over the five years that were to follow. And the Bank of England was concerned that if interest rates soared at such a fast pace, it could mean that a borrower’s mortgage payments might very rapidly become unmanageable if not kept in check.
So, by working out whether a person’s surplus income (that is, income that isn’t eaten up by all the other financial/general living commitments we have) would be enough to cover a future jump in rates, the Bank of England felt that it was helping to future-proof mortgages for borrowers.
However, this rule could sometimes be a cause of frustration for those applying for mortgages. For example, to a first time buyer paying hundreds of pounds each month more in rent than they would be on their potential new mortgage, the idea of being turned down because they couldn’t afford it felt absurd.
The Bank of England decided that this rule was no longer serving much purpose, especially with so many borrowers choosing fixed rates and so few ending up reverting to their lender’s SVR, so announced that as of the 1st August 2022, lenders need not apply it to new mortgage applications.
So are there any affordability rules now?
Yes! One of the other main affordability tests that will remain is the Loan to Income (LTI) test. The LTI test restricts borrowers to only being able to take a maximum multiple of their income. Usually 4.5 times their total annual income; although certain lenders and mortgage types can provide greater amounts.
The Bank of England has said that it regards this LTI test, coupled with the various other affordability rules that the Financial Conduct Authority (FCA) also enforces on lenders, as strong enough to safeguard borrowers against taking out bigger mortgages than they’re able to repay.
What happens now?
The Bank of England has left it down to individual lenders to decide if and how they amend their affordability assessments in light of the rule being scrapped, and it’s clear that responsible lending must remain at the heart of each lenders criteria. So we’ll need to wait and see how lenders react to the change. It’s possible that those who struggled to meet the old stress test (for example, first time buyers, self employed or contractors) may see an increase in their borrowing capacity going forward.
If you want to find out more and/or find out your borrowing capacity, you should speak with an independent mortgage adviser who can help you understand your options.
Helen Peel – 5th August 2022