In the week that the mortgage loan stress test was withdrawn, the Bank of England has increased the base rate to 1.75%. It is thought this may push inflation up to 13% and cause the UK to fall into recession in 2022. The Bank’s target inflation rate is 2%.
The average standard variable rate mortgage payment will rise by £59.17 per month and the typical tracker rate mortgage by £51.98 per month.
On the Monday, the Bank of England withdrew the affordability test that forced mortgage lenders to assess the ability of new borrowers to cope.
This does not mean that borrowers can take out loans for as much as they like. The loan to income ratio limit is still in place, usually up to 4.5 times the borrower’s salary. In rare cases this may be slightly higher. The loan to income flow limit (ratio) is thought to be far more significant in guarding against indebtedness than the affordability test has ever been.
It is also likely that lenders will choose their own test to assess the suitability of home buyers for a mortgage.
The move may make it easier for some borrowers to obtain a mortgage but it is unlikely to make a significant impact on home ownership, at a time when the biggest hurdle to owning a home is raising the deposit.
What was the mortgage affordability test?
The test was first introduced in 2014 as a measure to avoid the scandal that was partly responsible for the 2008 financial crisis. Mortgage mis-selling had caused banks to lend so much money that it threatened their own financial stability, but encouraging borrowers to take out loans that may never be repaid. Mortgage interest rates increased to as much as 16% at the time, forcing many to lose their home or go into negative equity.
The affordability test required lenders to assess borrowers to ensure that they could not only afford the mortgage payments to which they committed but also that they could sustain the payments in the event of an interest rate rise of 3%. The affordability test was deemed a barrier to home ownership as it affected people who could otherwise afford the loan.
Who will benefit from the withdrawal of the affordability test?
It seems unlikely that the change will help many renters who want to buy their own home, even if the mortgage payment would be less than the amount they currently pay in rent. The Bank of England’s December 2021 analysis of renters who wanted to take out a first-time buyer mortgage in their area concluded that 83% were unable to raise a deposit of 5% by themselves. While 6% would be able to raise the deposit, they were not able to meet the affordability assessment if the ratio cap was 5.5. A further 1% would not meet the affordability test.
However, it is thought that some self-employed and freelance workers may find it easier to obtain a mortgage.
Will the withdrawal of the affordability test affect the housing market?
The potential of increasing the number of buyers onto the market could conceivably affect house prices. However, there is uncertainty over just how much of an impact might be felt and whether it could be reflected in a rise in house prices, which could potentially negate any improved access to the market.