Bank of England to withdraw mortgage affordability rules

Mortgage affordability tests which require borrowers to prove they could pay their lender’s standard variable rate plus another 3% will be scrapped this summer, the Bank of England has announced.

These tests were brought in following the 2014 Mortgage Market Review to ensure that homebuyers would be able to afford steeper mortgage payments should interest rates rise, and to prevent “an increase in household indebtedness that could in turn amplify an economic downturn and so increase financial stability risks”.

The hope was that they would help prevent a loosening of underwriting standards, as seen in the run up to the 2008 financial crisis, which could ultimately risk people losing their homes if they were unable to cover mortgage costs. The Bank has now decided that they are no longer required as other measures are “likely to play a stronger role” in preventing household debt from spiralling out of control. The changes will come into effect from 1st August 2022.

Critics argue that removing the test could mean borrowers take out bigger mortgages than they can afford to pay back. However, the amount lenders will allow homebuyers to borrow will still usually be restricted to 4.5 times household income. Some lenders will allow borrowers to take out mortgages at higher income multiples, although you’ll usually only be eligible for higher limits if you have a large salary and a substantial deposit to put down, or a significant amount of equity if remortgaging.

The hope is that the changes to affordability tests will give some flexibility to enable more people to get onto the property ladder, although there are concerns that they could result in even steeper house prices. According to the latest ONS House Price Index the price of the average UK home rose by £31,000 over the year to hit a new record high of £281,000 in April.

Someone looking to buy a property costing this amount would need a salary of at least £56,200, assuming they have a 10% deposit to put down and are borrowing 4.5 times their income.

Although the affordability stress test will be removed from August, borrowers must be prepared for the fact that mortgage costs are rising. The Bank of England increased the base rate from 1% to 1.25% in June, with further increases expected later this year to help dampen inflation. This means that if you’re considering buying or remortgaging, you may want to act sooner rather than later to secure a competitive deal .

If you aren’t sure how much you’ll be able to borrow, or how big a mortgage you can afford, a broker can explain the options available to you and help you find the best deal based on your individual circumstances.