The Bank of England plans to remove the rate rise stress test for mortgage borrowers, making it easier to get a bigger loan.
It will consult on scrapping the rule which requires applicants – whatever the initial rate they are applying for – to prove they could pay their lenders’ higher standard variable rate of interest, plus 3 per cent.
The affordability test, also known as a reversion rate, is designed to check that borrowers could still meet their mortgage payments in the event of a rate rise.
Removing or relaxing this restriction would make it easier for borrowers to take out larger mortgages – but mortgage experts have warned that doing so would also send house prices even higher than they are already.
Removing the 3% rate rise affordability check would make it easier to borrow more
This is a major concern, with house price inflation already running at 10 per cent in the last year.
Data released last week showed that house prices were rising at their fastest rate in 15 years, with the average cost of a home hitting £272,992.
The affordability rule was established in 2014 in order to tighten up mortgage underwriting standards and guard against increasing household debt following the financial crisis.
The credit crunch and subsequent crisis saw mortgage rates rise rapidly and many deals simply disappear, as banks and building societies dramatically reined in lending.
This forced borrowers unable to remortgage at the end of cheap deal periods on to their lenders’ expensive standard variable rates, leading to payment shocks as bills soared.
However, interest rates are much lower than they were in 2014 and many now believe the SVR plus 3 per cent measure is too onerous.
With the base rate now at 0.1 per cent, a scenario where a borrower would have to pay their lenders’ standard variable rate plus 3 per cent when their initial fixed deal came to an end is very unlikely.
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Some experts have welcomed news of the affordability test change, saying it would bring the rules more in line with the realities of today’s interest rate environment – as well as reflecting the fact that the majority of borrowers will remortgage when their fixed term ends, rather than drop on to a more expensive standard variable rate.
Mark Harris, chief executive of mortgage broker SPF Private Clients, said: ‘The rate environment and expectations have changed significantly since the rules were introduced in 2014, when borrowers were tested to ensure that mortgage repayments could still be met should rates be in the region of 6 to 7 per cent.
‘First-time buyers have been particularly hit despite affording rents far in excess of actual mortgage payments and potential stressings.
‘The availability of credit does have an impact on house prices so the hawks out there will insist these changes will only serve to inflate property prices further.
‘However, any additional potential borrowing would be tempered by the loan-to-income restrictions being maintained and lenders’ own affordability assessments.’
However, others said the true impact of any policy change was difficult to foresee.
NicK Mendes, mortgage technical manager at broker John Charcol, said: ‘Potential changes to the way lenders assess affordability, can only be welcome news to help more clients on their journey to become homeowners.
‘However, we have seen how changes in policy can be made with the best intentions, but the consequences are not what we would have expected.
‘The stamp duty holiday was a perfect example of this, with the surge in property prices, subsequently making homeownership that little bit further out of reach for some.’
The BoE also considered whether to allow lenders to increase the proportion of large mortgages they offer to people who need to borrow more than 4.5 times their salary. This is known as the ‘loan-to-income flow limit’.
This would have provided a boost to first-time buyers, who need to borrow more as they do not have the benefit of equity in an existing home.
However, the BofE decided against this.
Mortgage interest rates are now much lower than they were when the 2014 mortgage affordability rules were introduced, with the base rate at a historic low of 0.1 per cent
Some lenders have started relaxing some of their other affordability rules independently, however.
For example, Nationwide Building Society said in April that it was increasing the amount first-time buyers could borrow to 5.5 times their annual income – although borrowers would need to lock in for at least five years.
The Bank’s Financial Policy Committee, which carried out the review, said that having a limit on loans above 4.5 times salary would play a bigger role in avoiding an increase in borrower debt when prices rise, than testing their finances against a 3 per cent reversion rate would.
Governor of the Bank of England, Andrew Bailey, said: ‘The FPC’s analysis suggests that the measures have relatively little impact on mortgage market access, and that raising a deposit remains the most significant barrier to access, particularly for first-time buyers.
‘The LTI flow limit appears to play a stronger role than the affordability test in guarding against risks when house prices rise rapidly.
‘The FPC judges that, on current evidence, the LTI flow limit, without its affordability test but alongside the FCA’s affordability testing, delivers an appropriate level of resilience to the UK financial system, but in a less complex and more proportionate way.
‘FPC therefore intends to maintain the LTI flow limit Recommendation, but consult, in the first half of next year, on withdrawing its affordability test.’
