Opinion  

Hurdles remain despite scrapped mortgage affordability test

Chloe Cheung

Chloe Cheung

The start of the month saw the Bank of England withdraw the mortgage affordability test that had been introduced in 2014.

Broadly speaking, lenders stress-tested whether applicants would still be able to afford the mortgage if their rate rose by 3 percentage points above the reversion rate.

But the BoE’s news release from June, when it confirmed it would be withdrawing the affordability test, read like an emotional rollercoaster:

“The financial policy committee has confirmed that it will withdraw its affordability test recommendation… The other recommendation, the loan to income ‘flow limit’, which will not be withdrawn, limits the number of mortgages that can be extended to borrowers at LTI ratios at or greater than 4.5.”

Although discontinuing the test is a nice headline amid rising property prices, the central bank’s consultation response on withdrawing the test foresees little effect, with the majority of respondents agreeing the affordability test had had limited impact so far.

It also cited analysis that less than 1 per cent of renters had a large enough deposit to afford the median property in their region, plus enough income to pass the FCA’s responsible lending rules, but not the affordability test that has now been withdrawn.

Hefty deposits

With the LTI flow limit staying in place, the hurdle of saving a sufficient deposit remains, without considering the additional costs that come with buying a property, like conveyancing fees.

Taking the average price for first-time buyers at around £236,780 from the latest UK House Price Index, an average salary of £31,250 based on national statistics, and assuming you can borrow 4.5 times that, this would require a deposit of £96,155 – around 40 per cent of the property’s value.

For prospective first-time buyers in more expensive areas of the country, a high loan-to-value mortgage may be more useful if they were looking to purchase a retirement flat.

While there are measures designed to support first-time buyers, these can come with downsides and limitations, such as a 25 per cent charge for any unauthorised withdrawals from a Lifetime ISA, or a requirement to purchase an eligible new build with a Help to Buy equity loan.

Is saving on its own enough?

Saving for a deposit is an essential element of purchasing a property, but for many prospective first-time buyers it is an extremely patient process, with rising property prices also moving the goalposts.

Considering the magnitude of a deposit required in various areas of the UK, some of the more diligent saving habits, like opting for a packed lunch at work over a shop-bought sandwich, can feel as if they have as much effect as the BoE withdrawing the affordability test.

Besides seeking a pay rise, the reality for many first-time buyer hopefuls – especially in more expensive areas of the country – is that buying with another person or being fortunate to receive a gifted deposit from the bank of mum and dad has become a significant part of the home-buying process.