The Bank of England have eased borrowing rules by scrapping the affordability test. The withdrawal of the affordability test was announced in June but came in to effect on Monday 1st August 2022.
Also referred to as the “stress test”, lenders previously calculated whether potential borrowers would be able to make repayments if rates rose up to 3%.
What is the mortgage affordability test?
The mortgage affordability test was introduced in 2014 to restrict the mortgage market in the aims of ensuring the mis-selling scandal of 2008 would not reoccur amidst the 2008 financial crisis. The rule was implemented to ensure borrowers would not be at risk of financial instability or pose a threat to lenders by becoming indebted at a rate they would not be able to repay. Lenders assessed whether borrowers could afford a mortgage at the rate they were being offered and how they would be affected if interest rates rose by 3%.
Borrowers who could not prove they could cope with this eventuality may have been turned down for a loan on this basis, despite being able to afford a mortgage at the existing rate. As a result, the test may have been viewed as a barrier for some potential borrowers.
For some potential first-time buyers, this may have made the difference between comfortably affording rates higher than the potential mortgage payments and consequently failed the affordability assessments.
What is the impact?
Removing the test may help potential buyers get loans and could make the process easier for self-employed or free-lance employees. However, other rules in place such as strict loan-to-income limits may not make it easier for most people to get a mortgage.
Lenders will still use their own form of testing per criteria, meaning there would not necessarily be an immediate impact for borrowers as lenders will not need to change the process of assessing loans.
What checks remain in place?
Restrictions are in place to prevent borrowers from taking on loans they may not be able to afford to repay.
The loan-to-income “flow limit” restricts the number of mortgages lenders can grant to borrowers at ratios at or greater than 4.5x the borrower’s salary- it is rare that lenders would consider a higher loan-to-income ratio due to implications that may affect repayment.
In short, the LTI flow limit may outweigh the affordability test in preventing borrowers from mortgage approvals. The LTI is not being withdrawn and has a greater impact on people’s ability to borrow.
The FCA's Mortgage Conduct of Business responsible lending rules also require a wide assessment of affordability.
If you are unsure how you may be affected, speak to an adviser for professional guidance.
Source: Bank of England news release
YOUR HOME MAY BE REPOSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE