BOE to consult on withdrawing affordability test

In a review of its mortgage market measures, first introduced in 2014, it notes that the stress rate in the affordability test has remained broadly static. Its analysis also suggests the LTI flow limit is likely to play a stronger role than the affordability test in guarding against an increase in aggregate household indebtedness. 

A framework without the FPC’s affordability test would therefore be simpler and more predictable, and would reduce the impact on a small proportion of borrowers.

The LTI flow limit was one of two recommendations introduced in 2014 to guard against a loosening in mortgage underwriting standards. The policy limits the number of mortgages that can be extended at LTI ratios higher than 4.5, with the second being the affordability test which specifies a stress interest rate for lenders when assessing prospective borrowers’ ability to repay a mortgage.  

Off the back of its most recent review, the FPC has judged that the LTI flow limit - without its affordability test but alongside the FCA’s affordability testing - ought to deliver an appropriate level of resilience to the UK financial system. It, therefore, intends to maintain the LTI flow limit recommendation, but in the first quarter of 2022 to consult on withdrawing its affordability test. 

It’s also planning on introducing rules which require lenders to assess whether borrowers could continue to afford their mortgage if their mortgage interest rate increases to three percentage points above their standard variable rate. 

These measures are designed to limit the risks from excessive household debt. The FPC’s review also found the measure on lending at high LTIs was more effective at reducing risk in housing, while having less of an impact on borrowers in normal times. 

In addition to this, the committee continues to judge that banks are able to support UK businesses and households following the Covid recovery. Its latest stress test shows the banking sector is resilient to even very challenging economic scenarios.