Bank of England's mortgage affordability test recommendation to be withdrawn

by Aaron Strutt

Jun 19 2022

The Bank of England's Financial Policy Committee (FPC) has confirmed that it will withdraw its mortgage affordability test recommendation from 1 August 2022. 

Mortgage affordability tests were introduced in 2014 and specify a stress interest rate for lenders to use when assessing prospective borrowers' ability to repay a mortgage. It is used along with the loan to income (LTI) 'flow limit', which will not be withdrawn, and limits the number of mortgages that can be extended to borrowers at LTI ratios at or greater than 4.5. 

A statement on the Bank of England's website says: "The Recommendations were introduced to guard against a loosening in mortgage underwriting standards and a material increase in household indebtedness that could, in turn, amplify an economic downturn and so increase financial stability risks. 

"The FPC has regularly reviewed these Recommendations. 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."

Is this a good move for borrowers?

One large lender explained to Trinity Financial that the move was needed, as the rise in the Bank of England base rate would inevitably erode customer borrowing capacity.

If the base rate reached 3%, and lender standard variable rates increased to around 6.5-7%, that would have meant a stress rate of close to 10% versus the current industry average of about 7%.  

Banks and building societies offer a range of income multiples, including five and 5.5 times salary single or joint salaries. Some lenders will continue to be more generous than others, and with these changes, they will have more flexibility to provide sufficiently large mortgages.

Call Trinity Financial on 020 7016 0790 to secure a mortgage or book a consultation