Bank of England  

BoE axing mortgage test sends 'wrong message at wrong time'

BoE axing mortgage test sends 'wrong message at wrong time'
REUTERS/Henry Nicholls

The Bank of England’s decision to withdraw its affordability test recommendation following an industry-wide consultation has been labelled irresponsible by brokers.

Today (June 20), the Financial Policy Committee (FPC) said it would withdraw the test, which requires lenders to keep a 3 per cent interest rate rise stress test in place for prospective borrowers, on August 1.

It will be up to individual lenders to decide whether they wish to change their affordability measures after that date.

The test's removal was first floated in December after being introduced in 2014.

It now leaves lenders with the Financial Conduct Authority’s 1 per cent stress test over the first five years of a new mortgage, which is still in place through the ‘Mortgage Conduct of Business’ (MCOB) framework.

The Bank of England will also keep in place its 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.

Some brokers have argued the timing of the change could not be worse, and that it could lead to an increase in house prices and prospective home buyers taking on more debt and not being able to afford their interest rates in the future.

"If lenders remove their stress test, it will undoubtedly increase demand and push prices further," Mansfield-based broker Lewis Shaw told FTAdviser.

"And at a time when people will be stretched even further, to then remove the one barrier which stops people from falling into a financially precarious position is irresponsible.

"Especially just before we run into into a new energy price cap and when food prices are shooting up."

Shaw cited ex-Sainsbury's boss Justin King, who told LBC yesterday (June 19) the "worst is yet to come" for food prices, predicting "double digit food inflation" will be around for years rather than just the 12 months set out by the central bank.

"It’s a timing thing," Shaw explained. "If the economy was on track then this change would be appropriate. But this feels like we’re adding fuel to a fire that’s not really even set alight yet."

Shaw said it is feasible that people may not be able to afford their mortgages in the future once this test is no longer in place, especially against the backdrop of a rising interest rate environment. 

"Standard variable rates can move within a short period of time by a couple of per cent. We've seen that in just the past six months," he explained.

UK households are now facing the highest base rate since 2009, with lenders' lowest two-year fixed rates for remortgages having trebled since October, according to L&C Mortgages data.

Shaw also argued the test's removal sends a message that things are "slackening off". He added: "It could lead to people becoming further indebted if they don't think taking out finance matters as much. It sends the wrong message at the wrong time."