The Bank of England has issued a consultation on changing the affordability tests for large mortgages introduced in the wake of the global financial crisis.
Since 2014, banks have had a limit on the number of mortgages they can offer where someone is borrowing more than 4.5 times their salary.
In addition to affordability rules imposed by the Financial Conduct Authority, they also have a Financial Policy Committee affordability test, which means buyers have to demonstrate they can cope if the mortgage rate rose three percentage points higher than the reversion rate in the mortgage.
According to the Bank of England consultation, the Financial Policy Committee affordability tests mean six per cent of people have had to take a smaller mortgage than they otherwise would have.
This works out at around 30,000 mortgages a year.
Sarah Coles, an analyst at Hargreaves Lansdown, says: “The Bank of England plans to ditch a rule designed to limit massive mortgages.
“Letting people borrow more money looks like a risky move at a time when house prices are sky high and the outlook is uncertain. But the Bank is convinced the extra test isn’t fair any more, and that without it, there are still enough protections in place.”
She says the FPC’s affordability tests have seemed increasingly draconian over time, because they refer to reversion rates – the mortgage rate you’re moved to at the end of your deal – and insist you should still be able to afford your mortgage if your rate rose to three percentage points above your reversion rate.
Coles adds: “Despite mortgage rates dropping dramatically in recent years, reversion rates have remained remarkably sticky, so in order to qualify for a cheap mortgage, buyers need to prove they can afford a really expensive one.
“The worry is that this could mean more people able to borrow more money, which could make them vulnerable to over-stretching themselves to afford sky-high prices. Any weakness in the property market in the coming months could add the risk of negative equity for those who have borrowed much more. However, the Bank calculates that a combination of the FCA’s affordability rules and its own rule that limits the number of mortgages with a high loan-to-income will offer enough protection.”
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The Bank of England has also calculated that this process is not going to open the floodgates to huge numbers of new buyers, pushing prices so high that it undoes any benefit from making it easier to borrow.
According to BoE statitsics, 83 per cent of renters cannot afford a five per cent deposit anyway and of the remaining group, six per cent can raise a deposit, but cannot meet the FCA’s affordability tests and an assumed loan to income cap of 5.5 times salary.
Coles concludes: ”Meanwhile, around one per cent pass all these tests but couldn’t meet the FPC’s affordability test, which is a significant number but not enough to overwhelm the market.”
