What impact will new mortgage affordability rules have?

What impact will new mortgage affordability rules have?

Mortgage lenders are not going to "rush" to reduce stress testing following the Bank of England's decision to scrap a key affordability test.

Since Monday, lenders no longer have to assess whether borrowers will be able to afford a mortgage if interest rates increased by 3 per cent because the Bank deemed it was no longer necessary.

But speaking on the FTAdviser Podcast, Jeremy Duncombe, managing director of Accord Mortgages, said: "I don't think you will see any sort of rush for lenders to start reducing those stress tests. We are all stressing at around 7, 7.25, 7.5 per cent currently. I don't see that changing significantly, if at all.

"Also, remember, as part of the MCOB lending rules all lenders still have to stress at 1 per cent above the rate they expect mortgages to be during the term of that mortgage so there is already a stress test in there which isn't being removed and we have got the 4.5 times loan-to-income cap.

"This is a prudent market, lenders are in good shape and they don't want to change that."

In arguing that the rule should be scrapped, the Bank produced research which showed the rule forced 6 per cent of borrowers, or 30,000 people, a year to take out a smaller mortgage than they could have.

Danny Belton, head of lender relationships at Legal & General Mortgage Club, said the experience during Covid-19, when the number of 95 per cent loan-to-value mortgages dropped off a cliff but lending continued, showed borrowers were able to plug the gap if they had to, whether through help from family members or other routes.

He said: "There are two things [about the Bank's research]. Either those borrowers were going to stretch themselves to a place which might have been uncomfortable. The rules might have prohibited that. Or they have actually found a way to increase the deposits they have or needed to get in order to afford the property and get the outcome they would have wanted.

"I don't think it has been that prohibitive. Clearly there will have been some customers who were affected but on the whole it has not been a problem."

Duncombe agreed, saying someone borrowing less than they would have wanted was not a massive problem. He said borrowers taking longer terms, such as 40-year terms, was a bigger problem given the amount of interest they would end up paying.

He said: "The whole benefit of a mortgage is the shorter it can be, the less interest you will pay. If you feel you could afford a mortgage for 25 years but because of the affordability rules and stress testing you are having to move to 30 or 35 years then there is some customer issue there.

"So taking away the stress test, it will be the other end of the market it will benefit. People not having to take longer term mortages that they have had to do recently."