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June, 2022
Bank of England to drop mortgage market affordability test

The Bank of England has confirmed that it is to withdraw its mortgage market affordability test from August.

The Financial Policy Committee, part of the BoE, introduced the test in 2014 which specifies a stress interest rate for lenders when assessing prospective borrowers’ ability to repay a mortgage.

The purpose was to ‘guard against a loosening in mortgage underwriting standards and a material increase in household indebtedness that could in turn amplify an economic downturn and so increase financial stability risks.’

However, in a statement, the BoE said the loan to income (LTI) ‘flow limit’ measure of affordability, which limits the number of mortgages at 4.5x salary or greater borrowers can draw down, was “likely to play a stronger role than the affordability test in guarding against an increase in aggregate household indebtedness and the number of highly indebted households in a scenario of rapidly rising house prices.”

“The LTI flow limit without the affordability test, but alongside the wider assessment of affordability required by the FCA’s Mortgage Conduct of Business (MCOB) responsible lending rules, ought to deliver the appropriate level of resilience to the UK financial system, but in a simpler, more predictable and more proportionate way”, the BoE statement reads.

The FPC consulted in late February on the proposal to withdraw the affordability test and maintain the LTI flow limit, with the majority of responses supportive of the proposals.

It says no action is required from lenders as a result of the announcement as current affordability assessments ought already to be compliant with the FCA’s Mortgage Conduct of Business framework.