Consultation on affordability test withdrawal closes

The Financial Policy Committee (FPC) of the Bank of England consulted on withdrawing its affordability test Recommendation for mortgage lenders, a consultation that closed on 6 May 2022¹. The FPC published the consultation on 28 February 2022 and said it would maintain its separate loan to income (LTI) flow limit Recommendation¹.

The affordability test Recommendation (17/Q2/1), 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 3 percentage points higher than the reversion rate specified in the contract at origination¹. 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 any remortgaging where there is no increase in the amount of borrowing¹.

The FPC said the stress rate in the test had remained broadly static, reflecting stickiness in reversion rates despite the fall in average quoted mortgage rates, and that there was considerable uncertainty about how it might move in future¹. Its analysis suggested the LTI flow limit, which limits the number of mortgages extended at LTI ratios at or above 4.5 to 15% of a lender's new mortgage lending, is 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 when house prices rise rapidly¹.

The FPC 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% if it were withdrawn¹. 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If the Recommendation is withdrawn, affordability would still be assessed under the Financial Conduct Authority's Mortgage Conduct of Business (MCOB) responsible lending rules, which cover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. Lenders must assume a minimum stress buffer of 100 basis points, and unless a mortgage's interest rate is fixed for five years or more from the expected start of the term, lenders must take into account the impact of likely future interest rate increases on affordability¹. 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 affordability test has shaped how much some borrowers can take out on a mortgage, because lenders have had to check repayment at a stressed rate. The FPC's own estimate is that around 6% of borrowers, roughly 30,000 a year, took out smaller mortgages than they would have been able to without it¹. If the Recommendation is withdrawn, that constraint would no longer apply, though the FCA's affordability checks under MCOB would remain, including the 100 basis point minimum stress buffer¹. The LTI flow limit stays in place, so the cap on lending at LTI ratios at or above 4.5 remains¹. Nothing changes for existing borrowers on remortgaging without an increase in borrowing, which the test never covered¹.

What happens next

The consultation closed on 6 May 2022¹. 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 provide its summary of and response to feedback later in 2022¹. Responses were to be emailed to FPCMortgageMarketConsultation@bankofengland.co.uk¹.