Bank of England rips up rules despite rate rises

Following its latest review of the mortgage market, the Bank of England (BoE) Financial Policy Committee has confirmed that it will withdraw its affordability test Recommendation. This will come into effect from 1 August 2022.

Introduced in 2014, the test specifies a stress interest rate for lenders when assessing prospective borrowers’ ability to repay a mortgage. The stress test means borrowers have had to prove they could still afford their mortgage repayments if their mortgage rate were to increase to 3% above their lender's standard variable rate.

Mortgage underwriting standards 

The other Recommendation, the loan to income (LTI) ‘flow limit’, which will not be withdrawn, limits the number of mortgages that can be extended to borrowers at LTI ratios at or greater than 4.5.

The Recommendations were introduced 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.

Level of resilience 

The BoE is now ending these rules, announcing that an existing limit on mortgages with a high loan-to-income ratio and the Financial Conduct Authority’s other required affordability checks ‘ought to deliver the appropriate level of resilience to the UK financial system, but in a simpler, more predictable and more proportionate way.’

The move is likely to fuel competition among lenders and removing the restriction may soften any price slump for homeowners. The change could also lessen the impact of lenders’ own decisions to approve mortgages more cautiously, giving support to the market as it enters a more challenging phase.

Want to find out how much you could borrow?

Whether you want to buy a first or new home, or remortgage your current property, we’ll help you find the right mortgage for your needs. To find out more, contact The Surrey Mortgage Broker– telephone 01252 759233 – email richard@thesurreymortgagebroker.co.uk