FPC opens consultation on withdrawing affordability test Recommendation

The Financial Policy Committee (FPC) of the Bank of England opened a consultation on 28 February 2022 on a proposal to withdraw its June 2017 affordability test Recommendation (17/Q2/1), while maintaining its loan to income (LTI) flow limit¹. The consultation closes on 6 May 2022¹.

The affordability test, made in June 2017 and revising a similar Recommendation from June 2014, required lenders to apply an interest rate stress test assessing whether borrowers could still afford their mortgages "if, at any point over the first five years of the loan, their mortgage rate were to be 3 percentage points higher than the reversion rate specified in the mortgage contract at the time of origination"¹. It applied to all lenders extending residential mortgage lending in excess of £100 million per annum¹. At its September 2017 meeting the FPC confirmed the Recommendation did not apply to remortgaging where there is no increase in the amount of borrowing¹.

The LTI flow limit, introduced in 2014 alongside the affordability test, "limits the number of mortgages that can be extended at LTI ratios at or above 4.5 to 15% of a lender's new mortgage lending"¹. The FPC said it decided to maintain this limit but consult on withdrawing the affordability test¹.

The FPC said the stress rate in the affordability test had remained broadly static, reflecting stickiness in reversion rates despite falling average quoted mortgage rates, and that its analysis suggests the LTI flow limit is likely to play a stronger role than the affordability test when house prices rise rapidly¹. It estimated the affordability test could have caused around 6% of borrowers, roughly 30,000 per year, to take out smaller mortgages than they would have been able to in its absence, and that the share of new lending with an LTI of 4.5 or higher could rise slightly from around 10% to around 11%¹. It said the aggregate household debt to income ratio and the share of households with mortgages at high LTI ratios (at or above 4.5) are around 125% and 10% respectively¹.

If the Recommendation were withdrawn, affordability would still be assessed under the Financial Conduct Authority's Mortgage Conduct of Business (MCOB) responsible lending rules, which cover income and expenditure assessment and, in relevant cases, the effect of future interest rate rises¹. A lender "must assume a minimum stress buffer of 100 basis points"¹. The FPC said the only change would be that there would be no prevailing FPC Recommendation on interest rate stress tests for lenders to have regard to¹.

Why it matters for households

The proposal concerns the stress test lenders apply when assessing whether a borrower can afford a mortgage. If the Recommendation is withdrawn, the FPC says the only change would be the removal of its stress test from the assessment, with the FCA's affordability checks under MCOB continuing to apply¹. The FPC's own estimate is that the test could have caused around 6% of borrowers, roughly 30,000 a year, to take out smaller mortgages than would otherwise have been possible¹. The LTI flow limit, which caps lending at or above 4.5 times income at 15% of a lender's new mortgage lending, would remain¹. The FPC's analysis suggests the share of new lending at an LTI of 4.5 or higher could rise slightly from around 10% to around 11%¹. The FPC also published figures on renters' deposits: 83% of renters currently lack the savings to raise a 5% deposit themselves, a further 6% could raise a deposit but cannot meet affordability assessments under the FCA's MCOB framework and an assumed LTI ratio cap of 5.5 even without the FPC's test, and around 1% of the remainder would not currently be able to meet the FPC's affordability test¹. The Mortgage Market Review set the framework of affordability rules that today's assessments sit within.

What happens next

The consultation closes on 6 May 2022, with responses emailed to FPCMortgageMarketConsultation@bankofengland.co.uk¹. The FPC said that in the event of deciding to withdraw its affordability test, it would expect to formally withdraw the Recommendation within 12 months of making the decision, and that it intends to publish its summary of and response to feedback later in 2022¹. The FPC said it will continue to monitor risks related to household indebtedness and the mortgage market, and is ready to act in future if these risks build, including by recalibrating existing measures or introducing new ones¹. The consultation process is set out by the Bank of England.