Bank of England to help mortgage affordability

The Bank of England is deciding on whether to improve mortgage affordability by withdrawing its affordability tests on all mortgages taken out in the first six months of 2022. The Bank of England’s Financial Policy Committee will meet to discuss this potential strategy soon. This could make getting a mortgage easier for some aspiring homeowners, including first-time buyers and those purchasing property in the south.

What is the affordability test?

In 2014, the Financial Policy Committee made two recommendations to mortgage lenders to make the industry more secure to both the lender and homebuyer. These were a loan to income limit and an affordability test.

In a nutshell, the affordability test is a stress test applied to see whether the homebuyer could still meet their mortgage repayments if their interest rate was to increase by three percentage points above their SVR.

So, why withdraw the affordability test?

The affordability test was an additional safeguard to prevent lenders providing mortgages to people who may not be able to afford them if interest rates increased. So why would the Bank of England consider erasing this sensible measure?

They are considering withdrawing the mortgage affordability test because a review has found that it is not necessary. The review states that existing affordability testing implemented by the Financial Conduct Authority, as well as the loan to income limit introduced by the Financial Policy Committee in 2014, are sufficient.

Will this make mortgages more affordable?

In theory, withdrawing the affordability test could make getting a mortgage easier for some people, including those buying a second home or investment property. However, it is believed that first-time buyers and people buying in the southeast of England where house prices are highest will benefit most from the change. They would no longer have to prove they could pay for their home if rates ever exceeded 6%.

What is the loan to income limit?

The loan to income (LTI) limit is one of the two recommendations by the Bank of England’s Financial Policy Committee from 2014. It states that mortgage underwriters should not extend loans with an LTI ratio above 4.5. Thus, it should prevent homeowners from stretching their finances and borrowing above what they can realistically afford. The LTI is now considered the much stronger recommendation to prevent aggregate household indebtedness.  

When will the FPC make a decision?

The Financial Policy Committee will meet in the first quarter of 2022 to decide whether to withdraw the affordability stress test or not. If they do withdraw the test, it could be withdrawn on a trial basis at first before potentially being made permanent.

Contact our experienced team for help finding an affordable mortgage deal for your next property purchase. Our team are on hand to search for all types of mortgages for all types of buyers.

March 2022