Yahoo Finance How Bank of England's new rules will impact UK mortgages
Britons trying to get on the housing ladder might soon be able to borrow more for a mortgage as the Bank of England considers removing the affordability test that limits how much banks can lend.
Currently, borrowers are subjected to two tests when taking out mortgages. The first is the "flow limit", which caps the number of mortgages that can be extended at loan-to-income ratios at or above 4.5% to 15% of a lender’s new mortgage lending.
The second is the "affordability test", whereby lenders assess whether borrowers could continue to afford their mortgage if the interest rate rose to 3 percentage points higher than the reversion rate.
Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said the affordability tests have “seemed increasingly draconian over time, because they refer to reversion rates — the mortgage rate you’re moved to at the end of your deal — and insist you should still be able to afford your mortgage if your rate rose to three percentage points above your reversion rate”.
Read more: UK property asking prices jump to record £348k in February
The Bank of England's Financial Policy Committee (FPC) has now launched a consultation to remove the affordability test while keeping the loan-to-income (LTI) flow limit.
FPC found that the flow limit measure on lending at high LTIs was actually more effective at curbing risk in a housing boom.
Borrowers such as first-time buyers or those buying in expensive areas of the country, such as the south east of England, are likely to be most affected by the affordability test.
Coles said: “The Bank of England plans to ditch a rule designed to limit massive mortgages. Letting people borrow more money looks like a risky move at a time when house prices are sky high and the outlook is uncertain. But the Bank is convinced the extra test isn’t fair any more, and that without it, there are still enough protections in place."
Analysis suggests the affordability test could have caused around 6% of borrowers — roughly 30,000 per year — to take out smaller mortgages than they would have been able to in its absence.
Property asking prices are up 9.5% this month compared to last year, with houses coming to the market at a record high.
Read more: What Ukraine invasion means for consumer prices in the UK
Coles added: "The Bank has also calculated that it’s not going to open the floodgates to huge numbers of new buyers, pushing prices so high that it undoes any benefit from making it easier to borrow.
“It says right now, 83% of renters can’t afford a 5% deposit anyway. Of the remaining group, 6% can raise a deposit, but can’t meet the FCA’s affordability tests and an assumed loan to income cap of 5.5 times salary.
"Meanwhile, around 1% pass all these tests but couldn’t meet the FPC’s affordability test, which is a significant number but not enough to overwhelm the market.”
The Bank of England said keeping the loan-to-income flow limit “ought to deliver an appropriate level of resilience to the UK financial system, but in a simpler, more predictable and more proportionate way”.
Myron Jobson, senior personal finance analyst at interactive investor, said: “Affordability has been a perpetual issue for wannabe homeowners for many years, and while loosening the mortgage underwriting standards might ease their plight, lenders’ approach to affordability will continue to vary. As such, it is unlikely that six times income multiples will be offered by lenders across the board.
Read more: UK house prices: Average cost to own a home hits £275,000
“Rather than loosen affordability, lenders should take into consideration factors that demonstrate an affordable budget. Many prospective buyers pay multiples of a mortgage payment on rent but are still viewed unfavourable by mortgage lenders.”
The consultation will close on 6 May after which the responses will be considered by the FPC. In the event of deciding to withdraw its affordability test, the FPC would expect to formally withdraw the affordability test within 12 months of making the decision.
