Bank of England  

BoE mulls dropping mortgage affordability rule

BoE mulls dropping mortgage affordability rule

The Bank of England has said it will consult on whether to withdraw its affordability measure which borrowers currently have to pass if they want to take out a mortgage with a UK lender.

The rule requires a borrower to earn enough income to afford their mortgage repayments even if interest rates rise by 3 per cent above the rate stated on their contract.

It is designed to limit the risks of excessive mass household debt, particularly during times when house prices grow more rapidly, as they have done throughout this year.

If dropped, the rule change could see far more borrowers able to take out larger mortgages than they could do prior to the stress test.

The Financial Policy Committee’s initial review, cited by the Bank of England yesterday (December 13), argued its loan-to-income limits, paired with the Financial Conduct Authority’s rules on affordability testing, “should be enough [combined] to protect UK financial stability” and “would also make the rules simpler”.

The FCA requires mortgage lenders to assume interest rates will rise by a minimum of 1 per cent over the first five years of a new mortgage in their affordability tests.

With a stress test still in place, but at a lesser per cent, the FPC "therefore intends to consult in 2022 Q1 on withdrawing its affordability measure", the central bank said.

Explaining its reasoning for the proposed change, the Bank of England said the FPC found its measure on lending at high loan-to-incomes - which will remain unchanged - was “more effective at reducing risk in a housing boom”, while also having less impact on borrowers in normal times. 

“The affordability test implies a different maximum level of indebtedness for each individual borrower, as each affordability assessment will depend on individual borrower circumstances,” the Bank of England said,

“This means that, unlike the loan-to-income flow limit, its effect is less likely to be contained to the riskier parts of the distribution of household debt.”

The FPC’s loan-to-income ratio rule means no more than 15 per cent of all new mortgages up and down the country can have loan-to-income ratios of 4.5 or higher.

The share of new mortgages at loan-to-income ratios of 4.5 or higher was 10.4 per cent in 2021 Q1, which the Bank of England called “a marginal increase” from 9.5 per cent in 2020, and highlighted was “lower than its pre-global financial crisis level”.

“Despite a small uptick in 2021, the proportion of households with mortgage debt-servicing ratios at or above 40 per cent has been steady at around 1–1.5 per cent, and remains significantly below levels seen just prior to the global financial crisis,” the Bank of England said.

Adam Hosker, director of broker Bespoke Finance, tweeted that instead of changing affordability rules, borrowers should be able to demonstrate an affordable budget.

“Most renters pay a multiple of a mortgage payment in rent but still [listed] ‘not affordable’,” he said.

Miles Robinson, mortgages head at online broker Trussle, said any changes to affordability “should be approached with an air of caution”.