Mortgage affordability consultation
In 2014, stringent mortgage affordability requirements were introduced by the Financial Policy Committee (FPC) in response to the global
financial crisis. Earllier this year, the Bank of England (BoE) has launched a consultation7 on the removal of one of these requirements.
The first of the two requirements is a ‘loan to income’ requirement that sees lenders mostly limited to off ering 4.5 times an applicant’s annual income. The second requirement is an ‘interest rate stress test’, which calculates an applicant’s ability to repay their mortgage if interest rates were to rise.
The BoE consultation
While the loan to income requirement looks set to stay, the BoE has launched a consultation into whether the interest rate test could potentially be removed. Despite evidence of falling mortgage rates over the past decade, the test is based on the average ‘reversion’ rate – i.e. the standard variable rate that borrowers are placed on following the end of a fixed-term deal – which has stayed largely static and is usually much higher than fixed-term rates. This means that borrowers must prove they can afford much higher repayments in order to take out
a relatively cheap mortgage.
The consultation, in particular, asks the following questions:
- What impact is the affordability test Recommendation currently having on the mortgage market?
- How would lenders and the mortgage market respond if the Recommendation were withdrawn?
- What effect withdrawing the Recommendation may have on the housing market as a whole and on particular segments of the market?
The consultation closed on 6 May 2022 and the responses are being considered by the FPC. In the event of deciding to withdraw its affordability test, the FPC would expect to formally withdraw the affordability test Recommendation within 12 months of making the decision.