21 Jun 2022
The Bank of England has confirmed that its Financial Policy Committee would axe its mortgage affordability test recommendation following a review of the mortgage market. The withdrawal will come into effect from 1 August, the BoE said on Monday. The UK’s central bank introduced the test in 2014 to ensure that borrowers do not become a threat to financial stability by taking on debt they could not afford to repay. The BoE added that its loan-to-income ‘flow limit’ would not be withdrawn and, amongst other affordability assessments, would help to protect the financial system in a simpler, more easy-to-predict manner. Under the current stress test, borrowers have had to prove they could still afford their mortgage repayments if their mortgage rate was to increase to 3% above their lender's standard variable rate. Based on today’s average, the scrapping of the affordability rule means that a typical borrower will no longer be verified on whether they could potentially afford an interest rate of 3 percentage points above 4.91%.
Mark Harris, of SPF Private Clients, tells the Daily Mail: “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.” However, others have been harsh in their criticism, including deVere Group CEO Nigel Green. He says: “This move by the Bank of England is bizarre, to say the least. The current affordability checks include a stress test to cover rising interest rates in order to avoid another 2007-style credit crunch. To scrap this important check to try and ensure borrowers don’t take on more debt they could afford, at a time when rates are rising and the UK is facing a significant economic downturn, is utter madness.” He adds: “Some might argue that the risks are pretty low, given the loan-to-income rules would remain intact, but they are risks nonetheless that borrowers and the UK economy can do without.” Mortgage rates in the UK have jumped considerably as the Bank of England’s base rate has climbed rapidly. If you’re looking to purchase your first home, move or re-mortgage, it's recommended that you get professional independent advice.