Credit, Collections & Insolvency News
Rules introduced in 2014 by the Financial Policy Committee (FPC) to restrict the amount mortgage applicants could borrow may be reversed following a review by the Bank of England (BoE).
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 affordability tests have meant 6% of people had to take a smaller mortgage than they otherwise would have. This works out at around 30,000 mortgages a year.
The Financial Conduct Authority (FCA) introduced strict rules governing how lenders assessed mortgage applications in the wake of the credit crunch, saying lenders had to consider the applicant’s income and expenses instead of lending borrowers a multiple of their annual salary.
On top of these affordability assessments, rules from the BoE force lenders to ‘stress test’ this affordability should their mortgage rate be 3% more than its standard variable rate for two-year fixed rates.
The Bank now believes the affordability stress test could be removed completely without jeopardising the economy’s stability.
In its review, the FPC concluded that the affordability test was no longer required because, “the LTI flow limit, without the affordability test recommendation, but alongside the wider assessment of affordability required by the FCA’s Mortgage Conduct of Business (MCOB) framework, ought to deliver an appropriate level of resilience to the UK financial system, but in a simpler, more predictable and more proportionate way.”
Commenting on the review, Sarah Coles, Senior Personal Finance Analyst at Hargreaves Lansdown said “The Bank of England plans to ditch a rule designed to limit massive mortgages. 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 that without it, there are still enough protections in place.”
“The FPC’s affordability tests have seemed increasingly draconian over time, because they refer to reversion rates – the mortgage rate you’re moved to at the end of your deal – and insist you should still be able to afford your mortgage if your rate rose to 3 percentage points above your reversion rate.”
“Despite mortgage rates dropping dramatically in recent years, reversion rates have remained remarkably sticky, so in order to qualify for a cheap mortgage, buyers need to prove they can afford a really expensive one.”
“The worry is that this could mean more people able to borrow more money, which could make them vulnerable to over-stretching themselves to afford sky-high prices. Any weakness in the property market in the coming months could add the risk of negative equity for those who have borrowed much more. However, the Bank calculates that a combination of the FCA’s affordability rules and its own rule that limits the number of mortgages with a high loan-to-income will offer enough protection.”
“The Bank has also calculated that it’s not going to open the floodgates to huge numbers of new buyers, pushing prices so high that it undoes any benefit from making it easier to borrow.”
“It says right now, 83% of renters can’t afford a 5% deposit anyway. Of the remaining group, 6% can raise a deposit, but can’t meet the FCA’s affordability tests and an assumed loan to income 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.”
