Lending affordability test to be abolished in August
Shift in mortgage rules aimed at helping first-time buyers
An affordability test for mortgage lending will be ditched from August, the Bank of England has confirmed.
The Bank has previously consulted on the potential impacts that withdrawing the affordability recommendation could have on mortgage lending, and it confirmed on Monday that the withdrawal will happen from August 1.
Two mortgage recommendations were introduced in 2014, to help guard against a significant increase in household indebtedness that may make any economic downturn worse.
These were a loan-to-income (LTI) limit and the affordability test, which specifies a ‘stress interest rate’ for lenders to consider when assessing a potential borrower’s ability to repay a mortgage over time.
The LTI limit, which will remain in place, limits the number of mortgages that can be extended to borrowers at LTI ratios at or greater than 4.5.
According to data from Rightmove released on Monday, the average asking price across Britain stands at £368,614 – with June marking the fifth month in a row that it has hit a record high.
Gemma Harle, managing director at Quilter Financial Planning, said: ‘While it is potentially bad timing for the announcement, the change in the affordability rules may not be as significant as it sounds as the loan-to-income (LTI) ‘flow limit’ will not be withdrawn, which has much greater impact on people’s ability to borrow.
‘Although the shift in rules is one of the many attempts to help first-time buyers get their foot on the ladder, it may end up having the opposite effect.
‘One of the main drivers behind ‘generation rent’ is the fact that house prices have massively outstripped wage growth. Due to high house prices, first-time buyers also need very sizable deposits and in the current fiscal environmentsavingthistypeofmoneywill be very difficult due to increasing rents and the cost of living.
‘On top of this, inflation will be eating away at any other savings they have sitting in cash.
‘House prices have become further and further out of reach for prospective buyers and this change in the affordability rules could perpetuate unsustainable further growth as it steps up demand in a market already suffering with limited stock.’