Bank of England removes mortgage affordability test for borrowers

Getting approved for a mortgage could be easier for some borrowers as the Bank of England will no longer require lenders to carry out an affordability ‘stress’ test.

The central bank test had required lenders to calculate whether borrowers could still afford their monthly payments if interest rates rose 3 percent above their providers’ standard variable rate (SVR).

In June, the average SVR hit a 13-year high of 4.91%, according to Moneyfacts, after rising 0.51% since December 2021.

This means that borrowers’ finances were effectively being tested against mortgage rates of nearly 8 percent.

Stress test scrapped: The Bank of England has relaxed rules on mortgage affordability, but lenders are not expected to revise their lending criteria

The test was introduced in the wake of the global financial crisis to prevent banks and lenders from building up loan books with a high risk of default.

SVRs are the ‘default’ rates borrowers move to when term offers end, and are typically very expensive.

Therefore, most borrowers switch to a new fixed mortgage offer and don’t end up with their lenders’ standard variable rate.

Those trying to move up or up the property ladder can hope that removing the test means they are more likely to be approved for a mortgage.

However, banks and building societies could still choose to maintain the test, or something similar, despite the Bank of England’s policy change.

Other borrowing restrictions are also maintained. Most commercial lenders won’t allow buyers to borrow more than 4.5 times their annual income, for example, though some may ask for a little more depending on the circumstances.

Ben Tadd, director of Lucra Mortgages, said: ‘Removing these affordability tests, starting today, does very little to help people borrow more money to buy a home.

“It’s certainly a small step in the right direction, but the larger problem of restrictive loans with multiple income limits needs to be solved.

“In theory, it marginally expands the pool of people now eligible for a new mortgage, but certainly, at least for first-time homebuyers, it still doesn’t go far enough to help those trying to buy their first home.”

The individual lenders have yet to disclose what action, if any, they will take.

Chris Sykes, technical director at mortgage expert Private Finance, said lenders have so far been quiet about any potential changes.

Once a lender announces a revised stress testing policy, it says others are likely to follow.

“Often when a domino falls, others follow suit, a precedence is set, so that if something happens, a bank can almost say ‘well, that’s how all lenders do it,'” he said.

The FCA Mortgage Conduct responsible lending rules still require lenders to conduct a comprehensive affordability assessment before approving a loan.

As inflation continues to rise and household costs, such as energy bills, rise, it's increasingly difficult for many first-time buyers to save for a deposit.

As inflation continues to rise and household costs, such as energy bills, rise, it’s increasingly difficult for many first-time buyers to save for a deposit.

Lenders show caution amid cost-of-living crisis

With mortgage rates on the rise right now thanks to rising inflation, some mortgage brokers say lenders may be reluctant to relax their affordability controls.

Ray Boulger, John Charcol Senior Mortgage Technical Manager, said: ‘The biggest danger for the market is a large and rapid increase in mortgage costs, because people have become used to bank rates at these low levels.

“I think most lenders will want to test still close to 3 percent until rates appear to be near their peak.”

When assessing the finances of potential borrowers, most lenders use data from the Office for National Statistics to estimate the average monthly cost of things like bills and groceries.

These costs have increased recently, and banks have factored this into their affordability calculations, making approval more difficult.

James Miles, mortgage adviser at The Mortgage Quarter, said banks could possibly use this extra flexibility to offset the impact on mortgage applications of Ofgem’s energy price cap in October.

“Hopefully some lenders will use this flexibility from the Bank of England to offset some of the rising costs and become more flexible again with affordability, while still taking a responsible approach to lending of course,” he said.

“The biggest concern is the rising costs of living which will reduce the amount first-time buyers can borrow, as most lenders use ONS figures to calculate disposable income.”

The average property now costs almost nine times the typical salary, as affordability of house prices in England has reached the worst level ever recorded by the ONS.

The best mortgage rates and how to find them

Mortgage rates have risen substantially as the Bank of England base rate has risen rapidly.

If you’re thinking about buying your first home, moving or remortgaging, or are a buy-to-let landlord, it’s important to get good, independent mortgage advice from a broker who can help you find the best deal.

To help our readers find the best mortgage, This is Money has partnered with independent broker L&C.

Our L&C-powered mortgage calculator can allow you to filter offers to see which ones best match your home value and deposit level.

You can also compare different fixed-rate mortgage durations, from two-year arrangements to five-year arrangements to ten-year arrangements, with monthly and total costs displayed.

Use the tool at the link below to compare the best deals, taking both fees and rates into account. You can also start an online application on your own time and save it as you go.

> Compare the best mortgage deals available now

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