Mortgage Affordability Tests to be Dropped in August

The Financial Policy Committee (FPC) has announced that it will withdraw is affordability test recommendation from 1 August 2022, following a review of the mortgage market. The ‘stress test’ was introduced in 2014, as a way to determine if a borrower could withstand moderate interest rate rises when making monthly mortgage repayments.

The idea was to safeguard against another financial crash, akin to the turmoil caused by the massive credit crunch of 2007/8. The blame for this was largely pinned on the widespread practice of lending of sub-prime mortgages, and since then, standards for borrowing to purchase a property have been tightened considerably.

However, in a press release, the Bank of England states that the loan to income (LTI) flow limit is adequate, alongside other measures, to assess affordability. This means that in the majority of cases, borrowers will still have to meet strict requirements, based on their income, outgoings, credit record, and how much they want to borrow.

Some commentators have nevertheless expressed surprise at the decision, given that the BoE have recently put up interest rates for the fifth consecutive time, and are now at 1.25%, the highest level for 13 years. For first time buyers, this means that they will be facing higher repayments when they take out a new mortgage.

The mortgage stress test sets the bar at 3%, so that if interest rates rose 3% above the lender’s standard variable rate (SVR), the borrower would have to prove that they could still afford the repayments. However, from the 1 August, that rule is set to be scrapped. This may make it easier for some applicants to be approved for a mortgage.

Mark Harris, chief executive of mortgage broker SPF Private Clients, told the Buy Association: “Scrapping of 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.”

He added: “Lenders will also still use some form of testing but to their own choosing according to their risk appetite.”

While some industry experts have welcomed the news, others have expressed concerns that the housing market is already oversubscribed, with demand for new homes far outstripping the supply. The loosening up of the affordability rules may put extra pressure on the market at a time when it is not in a good position to accommodate it. 

However, others view the change in a more positive light. The scrapping of the stress test may level up access for some first-time buyers who have been unfairly excluded from taking out a mortgage.

For example, an individual may have a good deposit and a long history of paying a hefty rent on time, but still have been excluded from home ownership because they had a modest income, or larger outgoings. However, lenders will no doubt still remain cautious, given the uncertain financial climate, and each applicant will be considered on a case-by-case basis.

If you are looking for Kingswood estate agents, please talk to us today.

Free Instant Valuation