Bank Of England To End Mortgage Affordability Stress Test

The Bank of England will axe a key mortgage affordability guideline designed to prevent people from financially overstretching.

Following its latest review of the mortgage market, the central bank's Financial Policy Committee has confirmed that from 1 August the affordability stress test making lenders pit borrowers' finances against their high standard variable rates plus 3 per cent will be withdrawn.

The test is part of recommendations introduced in 2014 in the aftermath of the financial crisis to guard against a loosening in mortgage underwriting standards and a material increase in household debt.

The stress test means borrowers have had to prove they could still afford their mortgage repayments if their mortgage rate was to increase to 3 per cent above their lender's standard variable rate.

With most borrowers on fixed rates and standard variable rates already higher than these, adding 3 per cent to them to test borrowers' finances has been criticised as unrealistic. 

SVRs are the default rate that people move to when fixed or other deals end and are far more expensive, Albeit, most borrowers switch to a new mortgage deal and don't end up on a standard variable rate.

The average SVR has reached a 13-year high of 4.91 per cent, according to Moneyfacts, following a rise of 0.51 per cent since December 2021.

Based on today's average, the removal of the affordability stress test means that a typical borrower will no longer be assessed on whether they could hypothetically afford an interest rate of 3 percentage points above 4.91 per cent.

The decision to remove this test may therefore offer respite to some borrowers, particularly given that higher mortgage rates and the cost of living is already beginning to have ramifications for affordability and what people can borrow.

Lenders are increasingly taking higher bills into account when assessing what borrowers can afford to pay each month toward their mortgage.

Santander, for example, has already factored increased national insurance, household expenditure and dividend income tax rates into its affordability calculations. Others are expected to do the same.

However, whilst the stress test will be scrapped, the other recommendation made in 2014, the loan-to-income 'flow limit,' will continue.

The loan-to-income ratio is the multiple at which banks will lend based on someone's annual salary.

This means banks will continue to place a limit on the number of mortgages they can offer where someone is borrowing more than 4.5 times their salary.

The loan-to-income flow limit was deemed more important than the affordability test in guarding against an increase in overall household indebtedness in an environment of rapidly rising house prices. 

At present, the regulatory requirement is that lenders only offer a certain number of loans over 4.5 times annual income.

Typically up to a maximum of 10 per cent, a lender's loan book can be reserved for those borrowing over 4.5 times their annual income.

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