The Bank of England (BoE) has announced that borrowers will no longer be subject to the mortgage affordability test from 1 August 2022. This means that lenders will no longer have to assess whether a mortgage applicant would be able to afford the mortgage repayments at a higher rate of interest.
The rule was introduced in 2014, in the wake of the financial crash of 2008, which was partly driven by the sub-prime mortgage market. However, other regulations are now in place which the BoE considers to be more robust and effective at assessing a mortgage applicant’s financial resilience.
The BoE said in a statement: “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.”
It added: “Therefore the LTI flow limit without the affordability test, but alongside the wider assessment of affordability required by the FCA’s Mortgage Conduct of Business (MCOB) responsible lending rules, ought to deliver the appropriate level of resilience to the UK financial system, but in a simpler, more predictable and more proportionate way.”
Some economists and business leaders have expressed bafflement at the decision, in light of the fact that the BoE has put up interest rates to 1.25%, the fifth consecutive rise and the highest rate for 13 years. This means that those seeking to renew their mortgage deal, and first-time buyers, will be subject to higher repayment rates.
However, others are confident that the remaining measures put in place by the Financial Policy Committee will safeguard against any extra risk, such as the loan-to-income framework.
Sarah Coles, senior personal finance analyst, told The Independent: “Banks still won’t be able to lend more than 15 per cent of mortgages to people with borrowing over 4.5 times earnings, and they have to meet FCA affordability standards too.”
She added: “This means they have to be confident borrowers can pay the mortgage when weighing up their income and expenses, and they have to take market expectations of future interest rates into consideration too.”
The change in rules may be helpful to some first-time buyers, and those looking to increase their mortgages. For example, if a potential borrower has a good credit record, and a history of paying rent far in excess of the hypothetical mortgage, then they may still have found themselves excluded from an approval due to a modest income, or high outgoings.
This type of borrower may now find that some lenders will be able to make them an offer. However, the changes will certainly not lead to the kind of reckless borrowing that led to the credit crunch of 2008. Borrowing will still be strongly linked to proof of earnings, and lenders are still likely to be cautious, especially in the current uncertain economic climate.
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