Brokers baffled as Bank of England drops mortgage aff...

The Bank of England has confirmed plans to withdraw the requirement for lenders to conduct interest rate stress tests on mortgage applications.

The Bank’s Financial Policy Committee introduced the test in the aftermath of the financial crisis in 2014 to ensure borrowers could afford changes in their monthly repayments.

It assessed how a borrower would cope if their rate in the first five years of their loan was three percentage points higher than the bank’s standard variable rate.

Critics said the test was too high given low interest rates and the Bank had been reviewing this policy since the end of last year and has now removed it.

Now the bank argues that a loan-to-income (LTI) flow limit on how many home loans can be granted beyond 4.5 times income and Financial Conduct Authority lending rules should guard against risky lending.

The stress test rule will be removed in August.

But Gemma Harle, managing director at Quilter Financial Planning, said the move was “baffling” given the current interest rate rises and soaring inflation.

She said: “With interest rates starting to creep up to meet the damaging impact of inflation and soaring energy and food prices you would think that people's ability to afford their mortgage should really be under the spotlight now.

“ However, this move by the Bank of England may illustrate that the long-term health of the housing market is predicted to be less than rosy, and this change is a means to guard against a real slump in house prices.

“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the change in the affordability rules may not be as significant as it sounds as the LTI ‘flow limit’ will not be withdrawn, which has much greater impact on people’s ability to borrow.”

Harle said the shift in rules is one of the many attempts to help first-time buyers get their foot on the ladder but may end up having the opposite effect as more people could apply for mortgages for already limited stock.

She added: “Ultimately, one of the key strategies the government should adopt to help first-time buyers onto the ladder is simply to build more stock.
“This has a natural effect of stabilising house prices and bringing them down due to the laws of supply and demand. This will be the only way of really helping the masses get onto the housing ladder.”

Lawrence Bowles, director of research at Savills, said: “From a market perspective, removing the current stress testing could mitigate some of the impact of higher interest rates. In theory, at least, it should open up a little more capacity for house price growth than is currently looking fairly constrained in the mainstream housing market.

“This said, a fairly high proportion of recent buyers have worked around the “standard variable rate plus 3%” stress test by locking into five-year fixed rates, meaning it will only preserve or open up additional borrowing capacity for part of the market.

"Lenders will still stress test applicants to reflect where they expect interest rates to be five years from the start of the loan, following the Mortgage Conduct of Business rules.

“Improved capacity for growth would also be dependent on how far lenders are prepared to push loan to income multiples under responsibly lending rules and caps on what they can lend at high loan to income ratios.

"It is unlikely to open up the mortgage-credit floodgates. It should allow lenders to be slightly more flexible which will come as welcome relief to some would-be-buyers struggling to keep up with current criteria because of significant price growth of the past two years – but saving for a deposit will remain the most significant barrier to home ownership.”