The Bank of England (BoE) has pressed ahead with scrapping rules introduced in the wake of the financial crisis that tested whether borrowers could afford their mortgages in the event of rapid interest rate rises.
Introduced in 2014, the test specifies a stress interest rate for lenders when assessing prospective borrowers’ ability to repay a mortgage.
However, following a review of the market, the BoE said on Monday that the mortgage affordability test recommendation would be withdrawn from August.
The Bank will maintain a cap on the number of borrowers who are allowed to hold loans more than four and a half times their annual income — also known as the loan-to-income (LTI) flow limit — it said.
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 aggregate household indebtedness and the number of highly indebted households in a scenario of rapidly rising house prices.
“Therefore the LTI flow limit without the affordability test, but alongside the wider assessment of affordability required by the FCA’s Mortgage Conduct of Business (MCOB) responsible lending rules, ought to deliver the appropriate level of resilience to the UK financial system, but in a simpler, more predictable and more proportionate way,” the BoE said.
Gemma Harle, managing director at Quilter Financial Planning, said: “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in the affordability rules may not be as significant as it sounds as the loan-to-income (LTI) ‘flow limit’ will not be withdrawn, which has much greater impact on people’s ability to borrow.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.”
The Bank said lenders do not need to make changes as a result, as current affordability assessments should already be compliant with the FCA’s responsible lending rules.
Financial information website Moneyfacts.co.uk said on Monday that the average mortgage standard variable rate (SVR) reached 4.91% in June, marking the highest level it has recorded since February 2009.
Mortgage borrowers may end up on an SVR when their initial deal comes to an end.
The average overall two-year fixed-rate mortgage stands at 3.25% — the highest since November 2014 — Moneyfacts said.
The overall five-year fixed-rate average sits at 3.37% and is the highest on Moneyfacts’ records since June 2015. The average two-year tracker rate is 2.54% — the highest since September 2014.
The Moneyfacts averages take all deposit sizes into account.