At the end of February, the Bank of England’s (BoE) Financial Policy Committee (FPC) published its promised consultation on plans to remove the mortgage affordability test, one of two recommendations first introduced in 2014.
These recommendations comprise the loan-to-income (LTI) flow limit, which restricts the number of mortgages that can be lent out at an LTI ratio of more than 4.5 times income, and the affordability test, which sets the stress interest rate.
In a review conducted late last year, the FPC decided that the affordability test was no longer required. It said just the LTI flow limit recommendation, working alongside the Financial Conduct Authority’s mortgage conduct-of-business framework, was enough to provide “an appropriate level of resilience to the UK financial system, but in a simpler, more predictable and more proportionate way”.
SPF Private Clients chief executive Mark Harris explains: “The economic environment has changed significantly since these policies came into effect.
“While they were drafted with the best of intentions, they have had unintended con-sequences with certain borrowers being excluded from the property market or restricted in some way.
“For example, there are tenants paying rents well in excess of typical mortgage payments because lender affordability tests suggest they can’t afford the mortgage payments.”
And ultimately, as Hargreaves Lansdown senior personal finance analyst Sarah Coles sums up: “The BoE plans to ditch a rule designed to limit massive mortgages.”
She continues: “Letting people borrow more money looks like a risky move at a time when house prices are sky high and the outlook is uncertain. But the bank is convinced the extra test isn’t fair anymore.”
And Quilter mortgage expert Karen Noye voices what many people perhaps are thinking: “The consultation has arrived at an interesting time as we continue to face a huge level of uncertainty.
“Just as we hoped to be coming through the other side of the pandemic, the situation in Ukraine serves as a stark reminder of the unpredictable world we live in.”
The affordability test hinges on the prospect of a borrower’s interest rate rising by three percentage points over the reversion rate. And, as Coles explains, reversion rates remain “remarkably sticky” despite mortgage rates falling in recent years. Therefore, “in order to qualify for a cheap mortgage, buyers need to prove they can afford a really expensive one”.
Coles describes this as something that has seemed “increasingly draconian” over the years.
But Noye says: “Generally, only a small amount of people are impacted by the affordability test recommendation.”
She explains that the LTI is the main driver of affordability, “as well as the other criteria placed on homebuyers by individual lenders”.
London Money mortgage consultant James Adkin agrees.
“We view every client on a case-by-case basis and have yet to have a scenario where a client cannot obtain the loan they require — unless their requirements were unrealistic from the outset,” he says.
Noye points out, however: “The property market has seen huge, continuous growth over the past couple of years and it is worth considering how house prices would react if the recommendation were withdrawn.”
She continues: “[This] could spark interest in homebuyers hoping to borrow more, which could cause a renewed flurry of buyers to the market.
“If this were the case, house prices would likely rise higher and could counteract any support a withdrawal might have offered to first-time buyers or to others in similar financial positions.
“The move would effectively give with one hand and take with the other.
“If the withdrawal were to cause a further uplift in house prices, the deposit needed to secure a mortgage would also increase.”
Meanwhile, Coles says: “This could mean more people able to borrow more money, which could make them vulnerable to overstretching themselves to afford sky-high prices.”
She continues: “Any weakness in the property market in the coming months could add the risk of negative equity.”
And Adkin warns: “Ultimately, borrowers often want to borrow as much as they can, to secure properties that are being priced at an ever-increasing rate by unregulated parties.
“The risk, of course, is if larger loans cannot be repaid by the borrower and we are back to 2007 all over again.”
However, both Noye and Coles echo the BoE’s belief that, ultimately, removing the affordability test will not open the floodgates to a huge number of buyers and thus things will not spiral out of control.
Cole references FCA figures: “Right now, 83% of renters can’t afford a 5% deposit. Of the remaining group, 6% can raise a deposit but can’t meet the FCA’s affordability tests and an assumed LTI cap of 5.5 times salary.
“Meanwhile, around 1% pass all these tests but couldn’t meet the FPC’s affordability test, which is a significant number but not enough to overwhelm the market.”
And a positive consequence to a withdrawal of or amendment to the rules could be, according to Legal & General Mortgage Club director Kevin Roberts, the encouragement of product innovation, “which would benefit borrowers, brokers and lenders alike”.
