UK borrowers will now see mortgage rules ease after the Bank of England decided to scrap their affordability test.
The previous mortgage affordability test, known as the ‘stress test’ forced lenders to calculate whether a potential borrower would be able to cope with timely repayments if interest rates reached 3%, says LimitedCompanyHelp.com.
The removal will certainly make it easier for some potential borrowers to get loans, including freelance and self-employed workers. However, strict rules such as the loan-to-income limits will still make it incredibly difficult for many to get a mortgage.
While the removal of the mortgage affordability test was announced back in June, it has only come into effect today, Monday 1st August.
Chief Executive of mortgage broker SPF Private Clients, Mark Harris, told the BBC that “scrapping the affordability test is not as reckless as it may sound.
“The loan-to-income framework remains so there will still be some restrictions in place; it is not turning into a free-for-all on the lending front.
“Lenders will also still use some form of testing but to their own choosing according to their risk appetite.”
As such, we are unlikely to see an immediate impact for borrowers because lenders will not need to change the way that they assess loans.
Chairman of the Financial Markets Standards Board, Mark Yallop, went on to tell the BBC that while the change would make it “slightly easier” for some borrowers to get a mortgage, he was unsure whether it would have a significant impact.
Yallop added that the “biggest constraint on new mortgages is the ability of borrowers to afford a deposit.”
The mortgage affordability test was originally introduced back in 2014 as part of a wide-scale tightening up of the UK’s mortgage crisis to essentially ensure that there were no repeats of the scandals that partially led towards the 2008 financial crash.
The test was put in place to ensure that mortgage borrowers did not become a threat to the financial stability of lenders by taking on debt that they would not be able to repay.
As such, mortgage lenders were required to work out if borrowers could afford a mortgage at the offered rate, as well as if they could afford it if interest rates rose to 3%. If they could not, then they may have been turned down for a loan on this very basis, even if they were easily able to afford the mortgage at the existing rate.
Mortgage affordability was thus seen as a major barrier for some borrowers in an attempt to become homeowners, with some potential first-time property buyers failing affordability assessments despite paying monthly rent payments which were far higher than their potential mortgage repayments. (Source: Rosca)
There are still some key protections that will remain in place to ensure that borrowers are not taking out loans that they may not be able to afford.
A main protection is the loan-to-income ‘flow limit’. This limits the number of mortgages that a lender can grant to borrowers at ratios at or exceeding 4.5x the borrowers’ salary.
In 2021, the Bank of England’s Financial Policy Committee 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”.