Bank of England scraps mortgage affordability test

Coming into effect today (1 August), the move will make it easier for borrowers such as freelancers and the self-employed to secure a mortgage.

The “stress test” forced lenders to calculate whether potential borrowers would be able to cope if interest rates climbed by up to three percent. 

The BoE announced the move towards the end of June, following the Financial Policy Committee’s review of the mortgage market. 

The stress tests were introduced in 2014, and specified a stress interest rate for lenders when assessing prospective borrowers’ ability to repay a mortgage. 

The BoE’s review, however, concluded the loan to income (LTI) flow limit should remain in place. This limits the number of mortgages that can be extended to borrowers at LTI ratios at or greater than 4.5. 

After a review of the rules in 2021, the BoE’s Financial Policy Committee judged that “the LTI flow limit 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 in a scenario of rapidly rising house prices”. 

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.