The Bank of England has launched a consultation on proposals to drop one of its mortgage affordability rules, but brokers say it may not make much difference as lenders are unlikely to follow suit.
The rule up for debate requires lenders to keep a 3 per cent interest rate rise stress test in place for prospective borrowers.
Its removal, which was first floated in December but has been called into question by industry bodies for years, would mean lenders no longer have to test affordability based on future interest rates.
Currently, some people are finding that even though their rental payments are higher than the monthly mortgage payment they have applied for, they are still being told by banks that they can’t afford a mortgage.
Withdrawing the 3 per cent stress test would help these people, among others facing affordability hurdles. But even if the Bank of England’s policy change does land, brokers have warned lenders won’t necessarily follow suit.
“Just because they get rid of a rule, doesn’t mean it’s going to be largely adopted by lenders,” Chris Sykes, associate director at Private Finance, told FTAdviser.
“Lenders have their own risk committees. The vast majority will make sure they [still] stress test to insure against interest rate rises.”
Sykes said it could be adopted by specialist lenders trying to seek higher levels of borrowing at a premium, while mainstream lenders might ignore it because they would want to minimise any bad debt on their books.
Dropping the 3 per cent stress test would leave lenders with the Bank of England’s loan-to-income ratio test, which requires a bank to multiply a mortgage applicant’s income by at least 4.5 to work out how much they can feasibly borrow.
Earlier this week the Bank of England said the loan-to-income flow limit was “likely to play a stronger role” than the 3 per cent stress test in guarding against an increase in households falling into debt.
Asked whether removing the stress test rule could pose a risk to the foundations of the housing market, having been introduced after the 2008 financial crash, Sykes agreed with the central bank that removing income multiples would have “a much larger impact” on house prices.
The Financial Conduct Authority’s ‘Mortgage Conduct of Business’ framework also includes a 1 per cent stress test over the first five years of a new mortgage.
“It’s not going to open the floodgates by any stretch of the imagination,” he said.
The rule change could, however, be useful to combat affordability changes expected by lenders following energy price increases and rising inflation, Sykes explained.
Lenders’ affordability calculators compare answers put in by mortgage applicants to Office for National Statistics data, which reflects the rising costs of living.
Inflation hit a 30-year high of 5.5 per cent last month, while both renters and current homeowners are facing projected rises to their annual energy bills of well over £1,000. In one case reported to FTAdviser, a homeowner’s annual bill had doubled from £3,000 to £6,000.