Mortgage affordability rule to be axed

Mortgage affordability rule to be axed from August 1

An affordability test for mortgage lending will be ditched from August, the Bank of England has confirmed. The Bank has previously consulted on the potential impacts that withdrawing the affordability recommendation could have on mortgage lending, and it confirmed on Monday 20th that the withdrawal will happen from August 1. One of the main drivers behind ‘generation rent’ is the fact that house prices have massively outstripped wage growth. Due to high house prices, first-time buyers also need very sizable deposits and in the current fiscal environment saving this type of money will be very difficult due to increasing rents and the cost of living.

Two mortgage recommendations were introduced in 2014, to help guard against a significant increase in household indebtedness that may make any economic downturn worse. These were a loan-to-income (LTI) limit and the affordability test, which specifies a “stress interest rate” for lenders to consider when assessing a potential borrower’s ability to repay a mortgage over time. The Loan to income ratio (LTI limit), which will remain in place, limits the number of mortgages that can be extended to borrowers at LTI ratios at or greater than 4.5. According to data from Rightmove released on Monday, the average asking price across Britain stands at £368,614 – with June marking the fifth month in a row that it has hit a record high. While it is potentially bad timing for the announcement, the change in the affordability rules may not be as significant as it sounds as the loan-to-income (LTI) ‘flow limit’ will not be withdrawn, which has much greater impact on people’s ability to borrow. Although the shift in rules is one of the many attempts to help first-time buyers get their foot on the ladder, it may end up having the opposite effect. On top of this, inflation will be eating away at any other savings they have sitting in cash. House prices have become further and further out of reach for prospective buyers and this change in the affordability rules could perpetuate unsustainable further growth as it steps up demand in a market already suffering with limited stock. The Government recently announced an extension of the Right to Buy scheme in England and an independent review of access to mortgage finance for first-time buyers, with the aim of widening access to low-cost, low-deposit finance such as 5% deposit mortgages. The Bank’s Financial Policy Committee (FPC) judged that the LTI flow limit is likely to play a stronger role than the affordability test in guarding against an increase in overall household indebtedness and the number of highly indebted households in a scenario of rapidly rising house prices. Therefore the LTI limit without the affordability test, but alongside the wider assessment of affordability required by the Financial Conduct Authority (FCA)’s responsible lending rules, should deliver the appropriate level of resilience to the UK financial system, but in a simpler, more predictable and more proportionate way, the Bank said. The Bank added that the majority of consultation responses were supportive of the proposals.