The Bank of England has issued a consultation over the Financial Policy Committee’s (FPC) plans to change its affordability test.
Since 2014, banks have had a limit on the number of mortgages they can offer where someone is borrowing more than 4.5 times their salary (the LTI flow limit).
In addition to the FCA’s affordability rules, the Financial Policy Committee (FPC) affordability test means buyers have cope if their mortgage rate rise three percentage points higher than the reversion rate in the mortgage.
The FPC says it has noted some concerns with how the affordability test has operated. In particular, the stress rate encapsulated in the test has remained broadly static, reflecting stickiness in reversion rates despite the fall in average quoted mortgage rates. The FPC says this demonstrates that there is considerable uncertainty about how the stress rate encapsulated in the affordability test might move in future, and in turn about the effect the test could have.
The FPC has therefore decided to maintain the LTI flow limit recommendation, but has decided to consult on withdrawing its affordability test recommendation.
Kate Davies, executive director of IMLA, said: “After proposals on the topic last year, today’s announcement of a consultation on removing the affordability stress test for mortgage applications will come as no real surprise to the sector, but is still very welcome. For some time, IMLA has been arguing that the combination of FCA MCOB rules, loan-to-income (LTI) limits and the 3% stress test have placed unrealistic demands on borrowers when compared to the rates they have actually been paying, or could expect to pay.
“We are particularly interested in the FPC’s analysis that the LTI flow limit is likely to play a stronger role than the affordability test in guarding against household indebtedness, and we shall be considering each measure’s relative effectiveness carefully as we develop our response to the consultation.”
Kevin Roberts, director, Legal & General Mortgage Club, added: “As it stands, to be accepted for a mortgage a prospective borrower must prove that they could still afford their mortgage repayments if their product’s interest rate was to rise by three percent above the reversion rate. This means rates well above typical 2 or 5 year offers and loosening this rule could help more borrowers to step onto the property ladder (particularly first-time buyers). Lenders also have a cap on how much business they can write above 4.5 loan to income and removing this again could help buyers, especially in areas with higher average prices.
“Whilst welcome, the proposal is certainly not without risk. The move is likely to find overwhelming support from would-be buyers already facing record house prices, however there is a risk some overstretch themselves and if house prices fall, find themselves in negative equity. The bigger risk however is the opposite of this in as much as any changes provide further stimulation to an already buoyant market, fuelling further house price growth which could ultimately put would be house hunters back in the same position of unaffordability. Advice from an independent mortgage adviser would be a good first place to start for anyone hoping any changes could help them.
“The consultation is welcome but maybe should also be aligned with ways to boost housing supply, if we really are to help first-time buyers.”
