Bank of England withdraws mortgage affordability test from Aug 1: Lenders can make their own judgment

LONDON June 21: The Bank of England said on Monday that its Financial Policy Committee would withdraw its mortgage affordability test recommendation following a review of the mortgage market.

The central bank introduced the test in 2014 to ensure that borrowers do not become a threat to financial stability by taking on debt they could not afford to repay.

Mortgage affordability is primarily based on your annual income and your monthly outgoings. Lenders can then make a judgement on whether the mortgage you’ve applied for is affordable.

Lenders will no longer have to check whether homeowners could afford mortgage payments at higher interest rates after the Bank of England ditched a rule originally designed to avoid another 2007-style credit crunch.

The rule, introduced in 2014, was intended to make sure borrowers did not take on more debt than they could afford, and potentially “amplify” an economic downturn and put financial stability at risk.

Following its latest review of the mortgage market, the Financial Policy Committee has confirmed that it will withdraw its affordability test Recommendation. This will come into effect from 1 August 2022.

Introduced in 2014 the test specifies a stress interest rate for lenders when assessing prospective borrowers’ ability to repay a mortgage. The other Recommendation, the loan to income (LTI) ‘flow limit’, which will not be withdrawn, limits the number of mortgages that can be extended to borrowers at LTI ratios at or greater than 4.5.

The Recommendations were introduced to guard against a loosening in mortgage underwriting standards and a material increase in household indebtedness that could in turn amplify an economic downturn and so increase financial stability risks.

The FPC has regularly reviewed these Recommendations. 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. 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.

The FPC consulted in February 2022 on the proposal to withdraw the affordability test and maintain the LTI flow limit, with the majority of responses supportive of the proposals.

Lenders do not need to make any changes as a result, as current affordability assessments ought already to be compliant with the FCA’s MCOB framework.