The Bank of England has denied new affordability tests for mortgage borrowers have priced huge swathes of people priced further out of homeownership.
Earlier this year the Bank of England told lenders to test mortgage affordability by using a 3 percentage point increase in their current reversion rate – usually the standard variable rate.
The previous rule introduced in 2014 stated lenders should consider a 3 percentage point increase in the base rate.
Bank of England Financial Policy Committee (FPC) member Don Kohn said despite industry concerns the new rules were locking people out of the market, the regulator had only seen the affordability tests have "a modest effect on mortgage lending and the housing market."
He added the new affordability rule was “locking in what we saw as good practice” on the part of lenders.
Speaking at UK Finance's annual conference in London today (8 November), Mr Kohn said factors other than the new affordability test, such as Brexit, were having a greater impact on the housing market.
The affordability tests were designed to forestall a build-up of heavily indebted households in a market where a lack of supply drives up house prices.
Mr Kohn said stress testing of borrowers would continue for the “foreseeable future”.
He said: “We will continue to monitor all aspects of the housing market consistent with our mandate to protect and enhance the resilience of the financial system.”
Mr Kohn’s comments came amid growing concerns over household indebtedness, with the Financial Conduct Authority recently revealing one in seven borrowers would struggle to pay their mortgage if repayments went up by less than £100 per month.
David Hollingworth, associate director, communications at London and Country, said stress tests should be regularly reviewed.
He said: "If we are looking at a longer period of lower interest rates, then the argument is perhaps stress tests should be reviewed and that could in turn help borrowers afford the homes and prices we know currently exist.
“It does not surprise me [the FPC] are sticking to their guns. We are at a point where the base rate has increased. I can’t see why they should be backing away from stress tests right now.”
simon.allin@ft.com
